Just because you are generating a lot of revenue doesn’t mean your business is profitable. To find out whether you are actually making a profit, you first need to calculate your company’s breakeven point – the point where your sales revenue meets your fixed and variable expenses.
Reviewing these 5 things to help you avoid any financial setback is not the only method to check if your business is doing well. Breakeven point plays an important part too. A breakeven point is when a business reaches a point where it is neither making profit nor losing money. A business needs to operate beyond the breakeven point for it to be termed a profitable venture.
As a business owner, you should perform breakeven analysis to find out how much revenues need to be generated to reach or surpass the breakeven point. As a means to that end, you need to track your company’s monthly expenses (including fixed and variable costs) and sales. Cloud accounting services and tools like xero accounting software can help you monitor your expenses and profit levels quickly and in an organized way.
You can calculate your company’s breakeven point, using the below formula.
Break-even point = Fixed costs ÷ (Unit selling price – Variable costs)
In order to use this formula, you first need to know what the terms exactly mean.
Fixed cost refers to a total of all overhead costs that do not change and must be paid, irrespective of whether the company is making a profit or loss. These may include employee salaries, office rents, loan repayments, utility bills, and many more.
On the other hand, variable cost refers to expenses you incur for manufacturing, packaging, and delivering one unit or product to your customers.
Unit selling price, as the term suggests, refers to the selling price of a single product. Note that only fixed cost refers to overall costs, while the other two – selling price and variable cost – refers to per unit cost or price.
Let’s say your company is selling mobile phone covers. Your fixed monthly cost including employee salaries, rents, loan repayments, taxes and depreciation cost amounts to $100,000. Your variable cost per product is $5. This includes manufacturing cost, shipping cost, any other expenses associated with the making, packaging, and delivery of the product. Finally, let’s say you set the price per unit at $10.
Now you can use the above formula to calculate your breakeven point. Here’s a look.
$100,000 ÷ ($10 – $5) = 20,000 units
This means you need to sell a total of 20,000 units to cover your total expenses, including fixed and variable costs. If you can sell more than 20,000 units, the additional amount would be your profit. However, if you fail to manufacture or sell 20,000 mobile phone covers, your company would suffer a loss. The less you sell the more would be the loss.
How cloud accounting can help you
Key challenges to calculate the breakeven point for your company include monitoring expenses and revenues. If the numbers are not correct and updated, you may end up getting a wrong estimate. This is exactly why you should use cloud accounting services and tools like the xero accounting software for tracking your ongoing expenses, especially for multiple currencies, and not forgetting, your monthly revenues too.