## How to calculate your breakeven sales figure

### August 28, 2009

One of the most important figures required by any business is the breakeven sales figure. Breakeven sales calculates what sales/turnover figure the company needs to cover all of its overheads. For a start-up business having this figure early on is crucial as it effectively sets the minimum sales target for the new business. The breakeven sales formula is short and relatively simple if you have the three figures that you need.

What complicates the calculation is that the cost of sales must be removed from the equation. The cost of sales is the amount spent on input costs for the final products sold, what was once called the cost of materials. So here are the three figures you need to calculate the breakeven sales:

1. The percentage of turnover/projected turnover/product sales that is made up by the materials/wholesale purchase/raw materials used in making a product, buying a product for resale or the core costs of delivering a programme/project. In other words, if the projected turnover is €100,000 and the cost of materials/goods for resale etc is €40,000, then the percentage of turnover made up by the cost of sales is 40%

2. The remainder of the turnover is available to pay overheads and when you exceed the breakeven sales figure is available as profit. This is the percentage of turnover not made up by cost of sales. In the above example it is 60%. This is one of the 3 figures you need in order to calculate breakeven sales.

3. The total overheads in currency value. Overheads are the expenses you incur which are not made up of actual cost of sales. Thus total expenses less cost of sales = overheads. These include salaries/wages, insurance, electricity, rent and rates, phone costs etc.

4. The last figure is 100.

Thus to calculate the breakeven sales figure you put your figures in to the following formula:

Total overheads in currency value X 100

________________________________

% of turnover not made up by cost of sales

Thus if overheads are €90,000, then the breakeven sales figure for the above example would be:

90,000 X 100 = 150,000

______

60

Thus your sales target to breakeven in the year would be €150,000 to cover €90,000 in overheads.

It is absolutely critical for start-up and early-stage businesses to have a clear understanding of their breakeven sales. A word of warning. Many start-up entrepreneurs say that I will not put in a proper salary for myself and I will take what is left over. This is very dangerous. Your salary costs are included in the overheads figure. If you do not put in a proper salary for yourself and you work out the breakeven sales on this basis, you will aim to achieve a breakeven sales figure that makes you nothing. Thus always put in a projection as to the salary that you need/want realistically when calculating the breakeven sales or everybody else will be happy but not you.

September 21, 2009 at 4:49 pm

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