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5 Step Venture eMentoring Program™

Session 3: Cost & Income Forecasting

Module 3c: Forecasting Breakeven

If you don't have any Fixed Expenses, and as long as you sell your products / services at least above your cost, you do not have a Breakeven issue. If you do have any Fixed Costs, you need to understand how much more business you must do to cover these costs before you start to make a profit. This additional level of sales is called your "Breakeven." It is where your business operation does not make a profit or show a loss.

In the preceding exercise you divided your expenses into the two categories of Variable Costs and Fixed Costs. You also calculated your Gross Profit. The Gross Profit is the amount that is left over when you subtract your Variable Costs from your Revenue. So the question is, how many times do you need to repeat this transaction before you have accumulated enough to cover your Fixed Costs? Here is a link to a short article that further explains Breakeven Analysis: www.buzgate.org/8.0/nh/ft_beven.html.

In its simplest form, you calculate your Breakeven by dividing your Fixed Costs by your Gross Profit. For example:

Whirligig Breakeven Analysis

a. Unit Price $25
b. Unit Cost $15
c. Gross Profit (a-b) $10
d. Fixed Costs $160
e. Breakeven (d/c) 16 units

In the example, sales of 16 units are needed to cover the Fixed Costs of $160. To get this amount, divide the Fixed Costs by the Gross Profit (160/10=16). That means, before you can actually have any profits you must sell more than 16 units.

The following Worksheet will help you calculate the amount of business you need in order to reach a specific net revenue goal. You can use the data from the proceeding exercise or you can experiment with different amounts to see the effect of changing your pricing or expenses.

Your Breakeven Analysis

a. Unit Price $
b. Unit Cost $
c. Gross Profit (a-b) $0.00
d. Fixed Costs $
e. Breakeven (d/c) 0.00 Units

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