Each new product made by a company will come with its own costs – costs which will leave a hole in your budget until it starts bringing some profit. The more time it takes until those costs are covered, the worse it will be for your company.
This is why the time to break even (or breakeven point) is such an important aspect to consider. This formula will tell you exactly how much time is needed until the costs of a product are covered by the sales – and when it will actually start paying off.
There are several variable costs that you will have to consider – variables which will generally give you an approximate number. However, for a small business, this number will tell you precisely how much it will take until your new line becomes successful.
The Breakeven Point Formula
As mentioned, there are several variables that you need to know when it comes to calculating the breakeven point. The first variable is the fixed costs – which are independent of the volume of the sales. In this category, costs such as the rent are to be considered.
The variable costs are also crucial when it comes to calculating the breakeven point. These costs depend on the volume of the sales – for example, the product manufacturing costs.
Depending on those numbers, you may have to wait more or less time until the break-even happens. Having that in mind, the break-even point will have the following formula: Time to Break Even = Variable costs + Fixed Costs.
You can also get the same result – maybe an even more accurate one – by adding the price of the product into the mix as well. Therefore, the formula would look something like this: Time to Break Even = Fixed Costs / (Price – Variable Costs)
Bear in mind that in this formula, the fixed costs are considered firm overheads – whereas the variable cost and price are applied to each individual unit.
Effects of Sales Change on Breakeven Point
Those with small businesses might wonder what would happen if the sales suddenly changed. Say, for instance, that the company is in recession – and that your sales are starting to drop. If this happens, then you might risk not even reaching your breakeven point – since you are not even selling enough products for that. If that happens, you won’t be able to pay the necessary expenses. A solution to this would be to raise the asking price of the product – but also to try and cut the costs. You can take away from the fixed or variable ones – whichever is more convenient for you.
Depending on these costs, the time to break even will vary. However, if you have an average, you will know whether or not your sales are successful – or if you need to start making changes to meet your breakeven point. Ideally, you should make these reports once every month, to get an accurate picture of what your next step should be.