The process of calculating the breakeven point for your startup is really quite simple in theory. The problem is that it is hard to predict for most businesses because the process requires you to make a number of assumptions. If these assumptions are wrong, your breakeven point could change drastically. This can cause a series of problems like a cash shortage, which will then cause you to either invest more of your personal money, find new investors, or secure a loan, all of which can be quite painful. Now let me explain how to calculate your breakeven point.
1. Calculate Gross Profit per Unit
Sales Price per Unit – Cost of Goods Sold per Unit = Gross Profit per Unit
If you are a service business you will do everything by the hour instead of the unit. For example, sales price per hour – cost of services sold per hour = gross profit per hour.
2. Calculate Fixed Monthly Expenses
Once you have gross profit you need to determine what your fixed expenses look like each month. Generally what I do is add up all of my monthly expenses, and then take any of my annual or or quarterly expenses and just divide by 12 months or 4 months respectively to come up with the monthly expense equivalent.
3. Determine Number of Units Sold to Breakeven
Now all you need to do is take your fixed monthly expenses divided by your gross profit per unit, and you will be able to determine how many units you need to sell in order to breakeven.
4. How Much Time to Breakeven
Now you can take it one step further and try to estimate how many days, months, or years it will take you to reach a breakeven point. For example, if you found out in the step above that you need to sell 500 units a month to breakeven and you are only selling 250 units a month now, you can estimate how long it will take to breakeven by figuring out how long it takes your sales team to sell one more unit and then multiply that by 250. If your sales team is increasing the monthly units sold by 5 units per day, then you would expect to reach a breakeven point in 50 days (250 divided by 5).
5. Funding Needed to Reach Breakeven
You can take it one final step by determining how much funding you will need in order to reach a breakeven point. If you know it is going to take you 50 days and your fixed monthly expenses are $10,000 per month, then your fixed expenses per day is $333.33. Three hundred and thirty three dollars times 50 days equals $16,666.67. You need to borrow, or invest approximately $17,000 in order to survive until you reach a breakeven.
There you have it. The calculations are really pretty simple. The hard part is predicting your cost of goods sold, your monthly expenses, and how long it will take you to generate new sales. If your assumptions are correct, this process will give you a good idea as to when and how you will breakeven.