Calculating your Breakeven Sales figure

January 10, 2013

As a consultant, business trainer or mentor one of the first things I want to get a business person or potential business person to understand and calculate is their breakeven sales figure for the current year. The breakeven sales figure is the turnover figure you must achieve to cover all your overheads and make neither a profit or loss. This should not be your sales target, which should be higher but rather the sales figure which you have to reach to not make a loss. It is easily calculated with 3 figures required:

1. Your total overheads for the year in real currency
2. Your Gross Profit Margin stated as a number
3. 100

The formula is simple:

Total overheads (€,£,$)         X       100
__________________              ___

Gross Margin as a number                1

A few comments on calculation:
• Total overheads include all your operating costs (fixed and variable). It does not include material costs (raw materials or items which make up part of the good or service sold to the customer) nor set-up costs (one-off costs incurred when establishing the business).
• Gross margin is the percentage of your total turnover or sales figure not made up of material costs. This can be calculated as a figure for your business annually: take your total sales figure or projected sales figure. Take the cost, or projected cost, of raw materials or products and calculate this as a percentage of the total sales figure. The remainder is your gross margin. Simply, if your total sales are projected at 100,000 and the cost of raw materials which are part of the goods or services sold makes up 40,000. Then material costs make up 40% of sales. Thus 60% of sales are available to cover overheads (and above breakeven sales contribute to profit). Your gross margin here is 60% and as a number 60.
• The breakeven sales figure tells you how much you need to sell, at the gross margin you operate at in order to cover all your overheads…breakeven…enough sales to cover all costs but not make a profit.

A few things to include:
• Always make a contingency as either a miscellaneous or sundries figure in your overhead figure. Things will arise that you cannot foresee and you need some wiggle room
• Always include a ‘survival budget’ for yourself. Calculate the amount of money you need to cover room and board (including mortgage payments if relevant), food and essential transport and other essential costs. Include this in your overhead figure. If there is not enough money coming in you will not get paid but if you do not include this ‘survival budget’ figure in your overhead calculation then you are underestimating your real breakeven sales figure and even if you achieve your false breakeven sales figure, everybody else will get paid and you will have nothing left to cover your living expenses. So, even if you do not take the ‘survival budget’ from the business, it must be included in the calculation of the breakeven sales figure
• Dealing with set-up costs: normally do not include set-up costs as they are generally seen as investment. They are usually legitimate costs for tax purposes but are not operational costs derived directly from the ‘running’ of the business as they were costs incurred when ‘establishing’ the business. However, this is what tax advisers exist to give advice on. I am sure there are different philosophies on this but I usually do not include them in breakeven sales figure calculations
• When looking for a bank or credit union loan remember that the loan and the repayments will increase the breakeven sales figure. If you get a loan you will have to make actual cash payments on a schedule to cover an element of the principal and interest payments. The total amount of loan repayments annually needs to be added to the overhead figure and the breakeven sales figure recalculated. Getting a loan will increase your overheads and increase your breakeven sales figure…a fact many people forget in real life

I will repeat that your breakeven sales figure is your minimum sales target and your actual sales targets should be higher but it is a figure you need to be aware of and your financial institutions and investors will be very aware of.

On our ‘Write Your Own Business Plan’ programmes we would start by building up your projected cash flow for the year, develop an income statement from the cash flow and calculate the breakeven sales figure from the income statement…and we develop the entire financial plan in one day (for more information on ‘investor-ready WYOBP’ programmes see: http://germaine.eu.com/?page_id=73).

The simple reality is that if you are looking for investment or finance and you haven’t got a handle on your breakeven sales figure then you are not likely to be taken seriously. Apart from which, we all need to know how much we need to sell to cover our costs.

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