# Do You Know Your Breakeven Point?

Your breakeven point is one of the key facts that you must know about your business if you are to be a success. Surprisingly many businesses do not – they either have an incorrectly calculated one, an out of date one or they don’t even know what it is.

### The Definition of a Breakeven Point

Your breakeven point is the amount of income needed to pay all your expenses, fixed and variable over a given period – usually your financial year. Income over that period must equal or exceed expenditure or your business is failing. The Micawber principle is one to always bear in mind.

‘Annual income 20 pounds, annual expenditure 19 pounds 19 shillings and six pence, result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery. ‘ (Charles Dickens:- David Copperfield)

It is very balck and white – no ifs, no buts. If expenditure exceeds income, you have a problem so knowing exactly what your expenditure is and calculating  your prices accordingly is critical.

On the face of it calculating your breakeven point should be simple.  Breakeven is the point at which fixed costs divided by the contribution margin of each sales unit equals 1.  What is the contribution margin – that is the amount left over when you subtract all the variable costs from the price of your product or service.

For example if you sell a product or service for £50 and it costs you £25 to produce or provide, then the contribution margin is £25.  If your fixed costs are £500, then you need to sell 20 units to break even.

500 ÷ (25 x 20) = 1

It’s simple on the face of it, but those simple figures hide a multitude of variables, to name but a few :-

• Prices change
• Products go in and out of fashion
• Depreciation of products if they hang around
• Suppliers want discounts
• Wages fluctuate