I Always Break-Even. Or Do I?

One person that knows if he is breaking-even is Jerry Seinfeld.  Well, at least the TV version of Jerry does.  Case in point, in one episode of Seinfeld, Jerry loses a stand-up gig and minutes later he gets another gig.  Then, he loses a $20 bill and finds another $20 in his old coat pocket.  Lastly, his usually down-and-out friend George starts seeing some success, and his usually successful friend Elaine becomes down-and-out.  Everything seems to even out for Jerry or in business terms, Jerry always hits break-even.

Break-even is the point in your business where you are generating enough revenue to pay all of your expenses.  Knowing your break-even point is one of the most important pieces of information that a business owner should know.  Whenever we talk to some of our clients, we find out they do not know what their break-even is.  They feel like they have a “round-about idea of what it is”.  However, this is not good enough to make significant business decisions, such as, purchasing inventory, hiring your next employee, or selling a new product or service. 

Let’s look at the most simple way to figure out your break-even:

Breakeven = Fixed Costs (FC)/Gross Margin (GM)%

Fixed costs are any costs that your business incurs whether you make money or not, such as, rent, utilities, insurance, payroll, etc.

Gross margin percentage is what you make after you pay immediate expenses associated with the product or service you offer.   This could be materials to make the product, payroll for the service, and even other costs associated with creating or delivering the product or service. 

Let’s take a look at the example below to calculate break-even for Miss Natalie’s Sandwich Shop. 

Fixed Costs = $5,000

Rent, utilities, insurance, payroll, etc.

Gross Margin% = 70%

Inventory (food and drinks)

Break Even = $5,000/70% = $7,143

This means that Miss Natalie’s Sandwich Shop has to make $7,143 every month just to pay the bills.  So, let’s take this a step further.  How many sandwiches will Miss Natalie’s Sandwich Shop have to sell to break-even?  Divide the break-even point by average sales price per sandwich.  In this case, the break-even is $8,000 and the average service fee is $5 per sandwich.  

$7,143/$5 = 1,429 sandwiches

This means it will take 1,429 sandwiches a month to break even.  Breaking this down even further, this means she needs to sell approximately 48 sandwiches every day.  Whew that’s a lot of bread, deli meat and cheese!   Knowing her break-even will give Natalie with the information she needs to be successful in making business decisions, such as pricing, when it is time to hire more personnel, marketing needs, etc.