Breakeven Point Formula: How to Calculate Your Business Breakeven Point

The breakeven point is the level of sales at which a business’s total revenue equals its total costs. At this point, the company is not generating a profit, but it is no longer operating at a loss.

A breakeven analysis helps business owners determine how much revenue they must generate to cover fixed and variable costs. Understanding this point is essential when launching a business, expanding operations or evaluating profitability.

Your breakeven analysis is the first step in planning for future growth. It shows how much sales volume you need to cover fixed and variable costs. Once your company has reached breakeven, all gross profit beyond that point goes directly to improving the bottom line.

When Should Businesses Use a Breakeven Analysis?

Most often, a breakeven point is used as a point of reference for:

  • Launching a startup or new small business
  • Expanding or downsizing operations
  • Applying for financing or business loans

Limitations of Breakeven Analysis

A breakeven analysis helps with many business choices. However, it does have limitations such as:

  • Ignoring the importance of cash flow management.
  • Making assumptions that fixed and variable costs will stay within the parameters that were used to calculate the breakeven point.

As a business scales, variable costs tend to increase rather than decrease, therefore making your breakeven point shift.

How to Calculate Your Business Breakeven Point

The formula for calculating the breakeven point is:

Breakeven Point = Fixed Costs ÷ Gross Profit Margin

This formula shows how much sales revenue a business must generate to cover its fixed costs before it begins producing profit.

Step 1: Identify Your Fixed and Variable Costs

The first step when calculating a breakeven point is to look at your annual financial statements. Your financial statements will reveal your fixed costs and variable costs.

  • Fixed costs do not vary in relation to sales volume. Some examples of fixed expenses are things such as rent, utilities, insurance, and depreciation.
  • Variable costs are the cost of goods sold and other costs of sales, such as direct labor and sales commissions.
  • Some costs may be part fixed costs and part variable costs. You will need to split these into separate categories based on your knowledge of your business as the business owner.

The last step is to calculate your company’s breakeven point. To do this, find your gross profit percentage by dividing your net sales less your cost of goods sold (COGS) by your net sales. Then divide fixed costs by your gross profit percentage to finally arrive at breakeven.

For example: If your fixed costs are $10,000 and your gross profit percentage is 25%. Your breakeven point is sales of $40,000 ($10,000 ÷ 25% = $40,000).

If you find that you are far from reaching your breakeven point, it may be time to cut costs. By doing so, you will inch much closer to profitability which is a must for the survival of your small business.

For help determining your breakeven point and creating a financial growth plan for your business, take our free profit-focused maturity assessment. Once completed, you’ll receive expert recommendations for advancing to the next level of business growth.

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