Many business owners excel in their technical skills but often overlook critical financial metrics. One of the most important metrics to track is breakeven volume. Understanding and monitoring your breakeven volume can absolutely transform your business on multiple levels.
Breakeven Volume is the number of units you need to sell to cover all your costs and ideally it’s best (and relatively easy) to calculate this on an annual, monthly, weekly and even daily basis. If the thought of calculating your own breakeven causes anxiety, get your accountant or finance manager to do it for you. Once its set up, its relatively easy to monitor (spreadsheets are great for this).
Many business owners don’t fully grasp breakeven, let alone monitor it. Some don’t distinguish between fixed and variable costs, focusing only on a positive bottom line. Others think they’re breaking even if cash at bank remains stable. Few use breakeven analysis to tackle issues like seasonality, reduce fixed costs or boost revenues to cover costs more effectively.
To calculate breakeven volume, you’ll need to know your business:
- Unit Sale Price: The mean sale price for your business – just divide total annual revenues by total units sold. If your business happens to sell many different products and/or services or run distinctive geographical or business unit entities, use this method to get a single unit sale price. Once you have this you can also calculate breakeven seperately across the relevant product, geographies, business units etc. If you sell services and not physical products you can divide your revenues by the total number of hours/engagements billed.
- Unit Cost: This is the direct or variable cost per unit sold. Divide the Cost of Goods Sold and other direct costs (e.g. transport or sales commissions) by the number of units sold. For service firms, variable costs are often very low – main costs are fixed (e.g. rent, insurances, etc.).
- Total Fixed Costs: All the regualar, usually recurring like salaries, rent, insurances, promotions, etc.
Steps to Calculate Breakeven
- Calculate Unit Contribution: Unit Sale Price minus Unit Cost. This is the money the business earns from selling a product. Alternatively, divide gross profit by units sold.
- Divide Fixed Costs by Unit Contribution to get the historical breakeven volume. Divide by 12 for monthly, by 52 for weekly, and by 365 (or total business days) for daily breakeven.
Example Calculation:
- Revenue per Unit: $5.00
- Cost per Unit: $2.00
- Unit Contribution: $3.00
- Fixed Costs: $100,000
- Breakeven per Year: 33,333 units
- Breakeven per Month: 2,778 units
- Breakeven per Week: 641 units
Unit Contribution is $5 minus $2, equaling $3 per unit. Annual breakeven volume with $100,000 in fixed costs is 33,333 units ($100,000 / $3). Weekly breakeven volume is 641 units. If open five days a week, the business needs to sell just over 128 units per day to break even.
Post-Calculation Steps
Once you’ve calculated your breakeven volume, ask yourself and your team/coach these questions:
- How does breakeven volume compare with current volume? Are you breaking even, losing money, or exceeding breakeven?
- What is the distribution of volume over time? Daily, weekly, and monthly volume show sales trends. How can you increase sales during quieter periods?
- When exactly are you not breaking even, and why?
- What creative new business or distribution models might improve breakeven?
Analysing Breakeven Volume Changes
- Price Increases: How does breakeven volume change with price increases of say 2%, 3%, 5%, 10%, and 15%?
- Product Mix: Should you focus on selling more high-revenue and/or high-margin products/services?
- Number of Transactions: How would increasing the number of transactions by 5%, 10%, and 15% impact breakeven?
- Direct Costs: How would decreasing direct costs (without compromising quality) alter breakeven?
- Fixed Costs: How would reducing fixed costs by 5%, 10%, and 15% change breakeven?
Breakeven analysis helps you think about ways to reduce the number of units needed to break even, or make it easier to cover both variable and fixed costs. Business owners who monitor breakeven typically make more informed decisions, optimise their business model and enjoy greater profitability and longevity.
