For many small businesses, there are several ways to calculate profitability. The break-even point one way. It is the minimum sales you need to recover your costs.
If you’re a retailer and you buy a trunk full of clothes for $400, and you know you can sell them for $800, what is the break even point? The break even point is $400, the amount to recoup your initial costs. If you have any sales past $400, then you make a profit. Hopefully you can sell all of the clothes at full price and make $400 from the trunk full of clothes.
If you are an online business, you can use the same basic calculation. For example, the monthly software for your online courses costs $100. For the year, your total costs are $1,200. You need to sell $1,200 worth of goods and services to break even. If you are selling your online course for $50, then you need to sell 24 courses to break even ($1200/$50). Any sales after 24 courses are then considered profit. Profit is the point when you can eat more than ramen noodles and move out of your parents’ house.
This is the simplistic version of calculating break even points. There’s also differences between accounting and financial break even analysis. You can also add in variable and fixed costs to your project as well.
Here’s a final example. Let’s suppose you are a 10 year-old entrepreneur planning to operate a neighborhood lemonade stand next Saturday. You, it’s more like your mom, spent $50 on lemons, sugar, cups, a table cloth, and a poster board sign. You want to pay yourself $15 an hour and work from 11 a.m. to 1 p.m. Now your total costs are $80 ($15 an hour X 2 hours = $30. Then add $50 costs plus $30 labor = $80 total). You believe that with your cute, crooked smile and freckles, you can sell the lemonade for $2 a glass. You need to sell 40 glasses of lemonade to break even ($80 total costs divided by $2 a glass = 40 glasses). For two hours, that is almost one glass every three minutes. It’s a hot day so you think you will be successful and will sell more than 40 glasses! Anything more than 40 glasses is a profit.
We could also add another layer of this and pretend that you are the super hustler and sold out of your supplies. Your poor mom makes a quick dash to the store and buys $20 worth of lemons, sugar, and cups. Now your new total costs are $100 ($80 +$20). At $2 a glass, you need to sell 50 glasses to break even.
Now you know some basic financial analysis and how to calculate a basic break even point. So get out there and make some lemonade from lemons!