How many products will you need to sell in order to cover your cost and at what level of sales will your business make a profit?
To answer this you will need to calculate and find what is the breakeven point of your business.
Breakeven point (or breakeven analysis) is the point in which expenses are covered, and anything that is sold above that point means that your business is making a profit.
Calculating the breakeven point is done by defining the relationship between expenses and revenues and understanding how expenses/cost will change as sales increase or decrease. Let’s look at how it’s done.
Cost: There are 2 types of cost/expenses:
- Variable cost - This cost is a direct cost for producing an item and therefore will increase or decrease as sales increase or decrease. For example: cost of material per unit, cost of sewing per unit, cost of packaging per unit etc, Based on that, if an item cost $10 to produce than to make 10 units the (variable) cost will be $100 ($10 x 10), to make 50 units the (variable) cost will be $500 ($10 x 50) and so on. To better understand your variable cost per item create a cost sheet for each of your items.
- Fixed cost – This cost is fixed and will not change as sales increase or decrease. For example: cost of rent/utilities, payroll expenses, monthly website hosting, etc. These are expenses that your business will have regardless of the sales volume. To help with calculating your fix cost use these budget sheets.
Revenue / Sales -This refers to the selling price, wholesale price if you selling wholesale and retail price if you sell direct to customer. Based on that if we look at a line that is being wholesaled where a single item sales for $24 than when selling 10 units the revenues will be $240, when selling 50 units the revenues will be $1200 and so on.
Contribution Margin – This refers to the margin between your variable cost and your selling price as follow:
CONTRIBUTION MARGIN = SELLING PRICE PER UNIT - VARIABLE COST PER UNIT
Now let's plug into this formula the above examples: $24 - $10 = $14
So once variable cost are covered, each unit sold will have $14 of profit that can go now towards covering your fixed cost/expenses. For example, if your fixed cost/expenses are $1400 per month and your Contribution Margins is $14, you will need to sell 100 units to cover your fixed cost and breakeven each month. Any unit sold over the 100 units will be your profit.
**Due to the nature of this business and offering a collection of products rather than one product, which means having products with varying degrees of cost and profitability, predicting a precise single variable cost margin is nearly impossible, therefore for the purpose of calculating the breakeven point use an average cost and an average selling price.
What should you do next?
- Calculate your Fixed cost per month using these budget sheets.
- Calculate your Variable cost per item using this cost sheet form.
- Decide (if you haven’t yet) on your selling price and calculate your Contribution Margin.
- Based on the above and using below formula calculate how many units per month you will need to sell in order to breakeven :
FIXED COST / CONTRIBUTION MARGIN = BREAKEVEN POINT (BY UNITS)
Now that you know your breakeven point will help you have a better perspective on your sells goals and predictions for the next year. Keep in mind that as your business grows you will need to revisit your breakeven point and adjust it accordingly.
** Need help calculating your breakeven point? Our budget sheets now include the formula to do it for you. Click to buy here.