Profit Breakeven


Positive cash flow (more money coming in than going out) is essential to keep a business going. To thrive, you need to understand the money flow in, through, and out of your business, and for some companies, this can even be a daily issue.

So how do we keep more money coming in than going out? Obviously, having good control of expenses and payables is essential to manage the outflow. Also, timing is crucial in managing cash. Making sure that you collect the receivables in a timely fashion ensures that money is coming in. Another key cashflow issue is maintaining an appropriate level of inventory and supplies. Again, a good, practical, rolling cash flow budget addresses all these issues.

After successfully monitoring your cash flow, the next issue to address is profitability. Breakeven is a great place to start to look at profitability. The definition of breakeven in your business is the point when your gross profit covers all your fixed costs. If you go above breakeven, then you are profitable.  So, here is the formula:


For This metric answers the question: How much do I need to sell to pay my expenses? 

You can calculate breakeven for a year, quarter, month, or even a week. Let's go through an example of a small business for one year. For our example, let’s consider a coffee shop, Java Noir. This coffee shop only sells black coffee (we'll deal with marketing in another article)! The cost to operate this shop is monthly rent (including utilities) of $750/month, salaries of $ 2,000 per month, and other fixed expenses of $500 per month. We know that the cost for coffee and water is $.10 per cup, and we sell a cup of coffee for $1.25. These details provide all we need to calculate our breakeven:

Yearly fixed expense $39,000  [ ($2000 + $750 + $500) x 12 ]

Gross profit per cup $1.15 [ $1.25 - $0.10 ]

Gross profit margin (Gross profit / Gross sales) = 0.92 (92%) [ $1.15/$1.25 ]

Breakeven sales  (Fixed expense / Gross profit margin) = $42,391.30 [ $39,000/.92 ]

Cups of coffee to sell to reach breakeven 33,913/year, 652/week, or 93/day (if you are open 7 days a week 52 weeks per year) [ $42,391.30/$1.25 ].

Knowing what it takes to reach the breakeven point (or go beyond it) lets you effectively develop a strategy to manage costs, increase profits, and track progress. Without that strategy, you’re shooting at a target blindfolded. You could waste effort unnecessarily, lose money, and not even notice those opportunities where a small, timely push could send you over the top!


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