Financial planning: When will you break even?

To stay in business, you have to make a profit. So how many widgets do you need to sell to start making money? You'll know the answer when you calculate your break-even point. It's an important concept to learn before you get started, because below the break-even point you generate losses, above that point it's profits. How do you figure it out? It's fairly simple. The break-even point is where sales cover costs.

Here's the formula in units: Total fixed costs divided by (Price per unit minus Variable costs per unit) equals sales at the break even point.

For example, you calculated that your sunglasses manufacturing plant has fixed overhead expenses of $7,000 a year. That covers items such as the rent, electric bill and payroll. To make, advertise and mail the sunglasses costs $4.50 a pair. That is your variable cost. You think you can easily sell the sunglasses for $12 each, based on your industry research.

So: $7,000 divided by ($12 minus $4.50) = 933

You would have to sell 933 pairs of sunglasses to break even.

In dollars, you can calculate the sales volume needed to reach the break-even point by multiplying the number of sunglasses you need to sell by the selling price: 933 x $12 = $11,196

Break-even analysis can show you profit levels of sales and help you determine the success of your project before you start. However, it does not help you to examine cash flow, the actual movement of cash in and out of business. Getting a handle on cash flow is essential to maintaining financial control.