This template also has the option to work out your break-even using your normal annual gross profit percentage which can use useful if you have multiple products and services.
Breaking even is when the difference between your costs and your sales is zero. A break-even calculator is an important tool that helps you determine the number of units or the amount of sales you need to make a profit of zero. Any more sales than that and you’re making a profit. Fewer sales than that and you’re operating at a loss.
You can also use this calculator to figure out what you need to sell in order to reach your financial target.
Plug in your own numbers to help you define your financial goal for the year and experiment with various factors to see how they affect the outcome, such as changing your per-unit price or lowering wages or overhead.
Even if overheads, wages, materials costs, and prices remain stable throughout the year, having a weekly target (number of sales per week) can keep you on track. If you know you need to sell a certain number of units or hours each week, you can make faster decisions depending on whether you're achieving your goals or failing to break-even.
The steps are:
Pay attention to the calculations the spreadsheet makes at this point.
Analyse the figures in the Results section. Here you'll see the total number of units you'll need to sell for the year to reach your desired financial return. You'll also see the number of sales required in dollars, as well as the number of units you'll need to sell each week to stay on track.
You'll probably have certain business overhead costs that you must pay each month to keep your operation running. They are 'fixed' each month regardless of sales.
These can include:
Second are the expenses that are linked to a sale. If you're a retailer, every time you sell a product you'll need to replace it. Manufacturers will have raw materials or components, other businesses may have freight, commissions, and possibly extra labour.
If you know your gross profit on each product, or an overall gross profit percentage, it's much easier to calculate your break-even.
Here's an example for a business making a single product to give you the idea of how break-even works. First, work out the gross profit on each product. This is the difference between the selling price of the product and its variable production costs.
For example, assuming your fixed costs per year are $300,000:
If your business has multiple products and services, then it's often too complicated to calculate one product at a time. In this case, work out your overall gross profit percentage and divide this into fixed costs.
In the above example if your gross profit across everything was 60%, then you divide this into $300,000 (which gives $500,000 worth of sales). As you're selling the product for $250 each, that's still 2,000 products a year.
In a service business you're usually selling your time and are unlikely to have variable costs of raw materials or products to buy. In this case it's even easier:
Try your own figures to see what hourly rate you come up with and decide if the rate is both competitive and feasible. Will you be able to meet that goal of 32 billable hours each week?
Complete a cashflow forecast with your break-even sales figures to triple-check your numbers. It will help ensure you've covered all possible costs, plus it considers when you get paid from customers and when you must pay suppliers. By entering figures that are as accurate as possible, you'll be able to:
Once you've worked out your break-even (in either units to sell, billable hours, or sales to reach), work out what you can do to lower the break-even level. For example, all the following will reduce your break-even point:
Calculating your break-even will help you determine the feasibility of the business, especially identifying your capacity. If you end up having to charge out 50+ hours a week or sell more products than there is demand for or than you can physically produce, then it's back to the drawing board.
If you need to sell more items than expected to reach your break-even point, there are several steps you can take to lower that point.
If you can increase the average value of each sale, you’ll widen the difference between the sale price and labour and materials. Developing premium products and services allows you to start selling items where you can charge more (which is different from increasing your price).
You could also focus on selling more of the products or services that have the biggest margins.
Reducing the percentage of costs compared to sales can help improve your profits, by widening the gap between what you pay for raw materials, stock, or components and the final selling price. Look at your ongoing, variable costs as chances are you’ll find ways you can cut back, such as:
Chances are there are products or services in your business that could be adjusted to improve your net profit percentage.
Reducing what you pay for raw materials, components, or employees who work directly on output will have a significant impact on optimising your costs. This assumes of course that you can maintain the quality and service your customers expect. List your direct costs from the highest to the lowest, select the top ten and then see if you can:
At times it’s possible to lower your overhead while still operating effectively. As you did with minimising purchases, rank your most expensive costs in order and then start working your way down, applying cost-saving tactics in areas where you’ll see the most reward. For example, could you:
Find out if it’s worthwhile to re-finance or amend how you bank. It pays to keep an eye out for deals that would better serve your bottom line. Check out our range of business finance options. Also talk to your banker, accountant, or financial advisor about whether leveraging house equity or selling other assets may be a better way to refinance your debt. Business loans generally have higher interest costs than your equity, so using personal cash to pay off debt may work out to be a more economical option, long-term.
By creating attractive product and service bundles, you may be able to convince your customers to purchase a high-end offer or sell them additional products and services. This will raise the average profitability of a customer and lower the number of customers you need to break even.
Once you’ve determined you need to take action to improve your break-even point, explore ways to do so. Such activities could include:
The break-even calculator is a great tool to discover the impact of discounting in your business, specifically, how much extra work you’ll need to do to make the same profit.
Most small businesses have three pricing options:
A break-even analysis can help guide you to decisions on numbers one and three: should you price low or high and what are the implications?
When you know your break-even point, you can safely discount your products or services without risking your profit margin or creating more work for yourself.
Pricing low can be a sound strategy, especially if you are aiming to find new customers and are happy to sell loss leaders, or you have a cost or price advantage. Discounting can also work in certain circumstances, for example, selling off old stock or to release working capital if funds are required more urgently elsewhere.
But if you’re fighting a price war with a competitor with deeper pockets, they’re probably always going to win. The other danger of pricing low is customers could perceive that your goods or services are lower quality than the competition, when in fact they may not be.
Other impacts from offering discounts can include:
Your number one priority should be focusing on the value of the product or service, rather than the price.
The best alternative to discounting is to be crystal clear and confident in presenting your value proposition.
Try this yourself. Complete the break-even calculator with your own data. Then see what happens when you lower the price by 5%. Then try 10% and 20%. You’ll see very quickly that the number of items or hours you need to sell, to recover your overheads, and make a profit increases dramatically.
This is the true cost of discounting: you need to work much harder to make the same money.
It goes without saying that increasing your price generates the opposite effect of discounting. For example:
Again, try this yourself. This time see what happens when you increase the price by 5%, 10% and 20%. The number of items or hours you need to sell, to recover your overheads and make a profit, plummets.
It’s reasonable for customers to expect the best deal possible, but discounting creates a variety of problems that impact profit margin, customer satisfaction, and even your reputation. Better alternatives include becoming stronger at demonstrating your value, reducing all unnecessary costs to match the customer’s budget needs, or walking away from a deal that won’t be profitable.
Increasing your price is the fastest and most profitable tactic to reach your break-even point sooner. Try increasing your price in small increments without changing anything else and see how the break-even amount lowers faster than lowering overhead, materials, or labour costs.
For example, you could:
Your competitors will influence your pricing to some degree, so think about how your competitors are charging and what they offer, as you may be able to increase your price and still be cheaper than the competition.
Do your products or services have a clear point of difference? If you can offer more, such as better quality, more features, or free installation, you may be able to charge more.
In addition, decide how you want to position your products or services. For example, customers often associate a high price with a premium product or service.
You may have to base your pricing on the industry you work in as each industry often has a current ‘market price’. If electricians all charge a similar hourly rate, it makes sense that your pricing would line up with their pricing, unless there is something that makes your services vastly different from the rest.
You’ll need to convince your target market that your products or services are worth the additional cost. Think about ways to justify a price increase. For example, you may be able to make your offerings more desirable by:
Also revisit your marketing materials to ensure they paint your products or services in the best possible light. Remember to talk about the specific benefits of your goods or services – not just the features.
Your customers are also likely to be more receptive to pricing increases if your customer service is up to scratch. It’s smart to revisit your customer service policies before increasing prices – even some basic refresher training for staff could help smooth the deal with your customers.
Reply to complaints promptly and respectfully, regardless of whether they are made directly or through your social media channels.
Before you decide to increase your prices, keep in constant contact with your customers, and take their feedback into consideration. Remember that you’re convincing them that the price increase is worth it to them to keep you as a supplier, so the customer experience, product and service must be consistently great.
There are two key signals to increase your price.
The most difficult part is informing your customers the price is increasing.
Options to consider:
Try to make price increases a habit. A yearly review may be the best time to include price increases into your strategy and thinking. Creating an annual process where you assess cost and customer performance is good business practice. While vendors want to be viewed as fair, the reality is that some customers are more expensive to serve than others.
Improving your bottom line is best achieved by increasing your revenue while building your profit margin in each sale. Doing these two things in tandem will lower your break-even and grow profit faster than most other tactics.
Use technology to track how you’re faring, so you’re relying on accurate data from your accounting software to give visibility over your financials, rather than an educated guess. You can also lean on the expertise of your accountant or adviser to keep you accountable to any margin targets, highlight any areas of concern and give you systems and benchmarks to keep you on track.
Here are some tactics to grow revenue and margin:
Build a larger pipeline of prospective customers by identifying your most successful promotional tactics and then repeat those activities. Regardless of whether that’s direct selling, online advertising, or social media, whatever worked in the past is likely to work again.
Other ways to increase leads includes:
Highlighting your expertise to potential customers is a great way to increase your leads.
Leads come in varying levels. Some are interested in what you do but are not yet ready to become a client. Others are ready to work with you, now. There are things you can do to encourage more highly qualified leads to reach out, such as:
Working with an outside person or company to manage your marketing takes the pressure off you and puts it in the hands of experts.
The benefits of outsourced marketing include freeing up your time to focus on other aspects of running your business, having an expert in your corner to guide your efforts, and getting a second perspective to analyse your results.
Tasks you can set include training staff on selling techniques and closing methods to help them convert, implementing an incentive or bonus scheme, and developing the content (eBooks, blogs, whitepapers) you’ll need for content marketing.
If you can increase the average value of each sale, you’ll improve your profit immediately. Ensure that your highest margin products and services are what customers see first, are profiled on your website, and have the greatest promotional budget. You should also train your employees to know which products have the highest margins and then incentivise them to sell more of those products.
Widening the difference between what you buy an item for and what you sell it at is an obvious way to increase margins, but there are other tactics such as:
Get in the regular habit of reviewing your margins to make sure they haven’t changed due to creeping input costs or sales discounts.
