## Managing money

To be profitable in business, it is important to know what your break-even point is. Your break-even point is the point at which total revenue equals total costs or expenses. At this point there is no profit or loss - in other words, you 'break even'.

## Why your break-even point is important

A business could be turning over a lot of money, but still be making a loss. Knowing the break-even point is helpful in deciding prices, setting sales budgets and preparing a business plan. The break-even point calculation is a useful tool to analyse critical profit drivers of your business including sales volume, average production costs and average sales price.

By understanding where your break-even point is, you are able to work out:

• how profitable your present product line is
• how far sales can decline before you start to incur losses
• how many units you need to sell before you make a profit
• how reducing price or volume of sales will impact on your profits
• how much of an increase in price or volume of sales you will need to make up for an increase in fixed costs.

There are a number of ways you can calculate your break-even point. One simple formula uses your fixed costs and gross profit margin to determine your break-even point.

Fixed costs exist regardless of how much you sell or don't sell, and include expenses such as rent, wages, power, telephone accounts and insurance. Your gross profit margin is the percentage of sales dollars left after subtracting the production cost of goods sold from the total sales figure. Use our interactive calculator to work out your gross profit margin.

Remember that this is a simplified formula and you should talk to a financial adviser when considering your business's profitability.

Use the following interactive calculator to help you work out your break-even point. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your break-even point.

Break-even point

Use this formula to calculate your break-even point.

Break-even point = fixed costs ÷ gross profit margin

Step 1

Use this formula to calculate your contribution margin.

Contribution margin = sales price - variable costs

Step 2

Use this formula to calculate your break-even point.

Break-even point = fixed costs ÷ contribution margin

If your business has multiple products, use this calculator to determine the break-even point per product.