What is breakeven point and how is it calculated?

The breakeven point is a KPI related to the profitability of your business. It is calculated before launching a business project and also when making key expenditures after the project has started. Veesion takes a closer look at what this KPI means, how to use it, and how to calculate it.

The difference between breakeven and profitability

The breakeven point represents the minimum level of sales (excluding tax) required to cover all expenses. If sales exceed this point, your business is profitable; if not, it operates at a loss. This KPI serves as a target to achieve.

It’s important not to confuse the breakeven point with the breakeven period, which is the number of days a company needs to operate before achieving zero profit.

In summary:

• Breakeven point = expressed in currency (e.g., dollars)
• Breakeven period = expressed in days

When to calculate the breakeven point

The breakeven point should first be calculated when drafting your business plan. This helps define your financial and commercial strategy, ensuring your project’s viability. The business plan serves as a key document to:

• Secure funding from banks or investors,
• Convince business partners,
• Make informed decisions for long-term success.

Additionally, the breakeven point is useful in scenarios like:

• Launching a new product or service,
• Changing strategy (pricing or business model),
• Reviewing expenses to cut costs,
• Preparing for supplier negotiations,
• Monitoring your business’s economic performance.

Steps to calculate the breakeven point

Assess Fixed Costs
Fixed costs are recurring expenses unrelated to sales volume, such as rent, insurance, and social security contributions.

Estimate Variable Costs
Variable costs, also known as operating costs, fluctuate with business activity. These include purchasing goods, energy usage, packaging, transportation, subcontracting, and raw materials.

Calculate Breakeven Point
To determine the breakeven point:

Calculate forecasted pre-tax sales:

Subtract variable costs to find the margin on variable costs:

Divide the margin by forecasted sales to get the contribution margin:

Finally, calculate the breakeven point:

4. Determining the breakeven point

To find the breakeven period:

• Divide forecasted turnover by 360 to determine daily turnover.
• Divide the breakeven point by daily turnover:

Example calculation

Imagine opening a business with the following:

• Fixed costs: $20,000 (12 months)
• Variable costs: $60,000
• Forecasted turnover: $135,000

Steps:

1. Margin on variable costs = $135,000 - $60,000 = $75,000
2. Contribution margin = $75,000 / $135,000 ≈ 0.556
3. Breakeven point = $20,000 / 0.556 ≈ $36,000
4. Breakeven period = $36,000 / ($135,000 / 360) ≈ 96 days

If your fiscal year starts January 1, your business will become profitable by March 6.

Additional key metrics

In addition to the break-even point and the break-even point determined above, there are other calculations you can use to set your targets and check whether they have been achieved. These include return on investment (ROI), added value, cash flow, conversion rate, etc.

For retail outlets (supermarkets, grocery shops, pharmacies, etc.), it may also be useful to measure :

• Sales per square metre, to compare the profitability of certain departments;
• The stock turnover rate, to find out how long it takes for products to be sold;
• The average price of a basket, which shows how much each customer spends in the shop;
• Shop footfall, measured using counters;
• The markdown rate, which corresponds to the percentage of products not sold or lost.

Optimizing breakeven analysis

Because the breakeven point is a critical retail KPI, consider using management tools to streamline calculations, minimize errors, and enhance analysis. Advanced software with AI capabilities can simulate scenarios and support strategic decisions.

Finally, since each business is unique, consult a certified accountant to validate your estimates and provide tailored advice.

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