Inventory forecasting: Protect working capital, fulfill every order, and keep customers buying. Useful...
Read MoreWhat is the Breakeven Point?
By Robert Tylor
Co-Founder & CTO – Salesorder.com | Software and expertise for wholesaler optimization
Do you have a good idea of the fixed and variable costs of your products? If so, you’re ready to calculate the breakeven point, which could provide some very valuable insights into your company’s finances.
The breakeven point tells you how many units you must sell to break even, beyond which your business can start generating a profit. As with optimal order quantity and cost per acquisition (CPA), it’s essential for all business owners to understand this figure.
If you’re not sure how to calculate breakeven units and don’t know what a breakeven point is, don’t worry, as we’ll cover everything in this guide, including:
- What is a breakeven calculator?
- What are breakeven units?
- How do you calculate the breakeven point?
- What is a good breakeven ratio?
- Is it better to have a low or high breakeven point?
Why are breakeven points important for wholesale businesses?
Breakeven points provide a milestone, a threshold. It’s the bare minimum that all businesses should hope to achieve, not just wholesalers. A business can’t expect to sustain itself over the long term if it repeatedly falls short of its breakeven point, but one that exceeds this point and continues to grow is on the right course.
If you want to fine-tune your wholesale business and stay above that breakeven point, check out our B2B whole ecommerce platform.
What you'll need to calculate your business’s breakeven point
You can use a breakeven point calculator to estimate this figure, but you’ll need a few basic pieces of information first. As soon as you have this info, it’s actually a very simple calculation.
The variables you need are:
Fixed costs
Fixed costs are your monthly costs regardless of how many units you sell. They include everything from insurance and rent to legal/accounting services, maintenance, utilities, and other general expenses.
Variable costs (per unit)
The variable costs are what you pay to sell each unit, including commissions, raw materials, and labor. They are variable as they fluctuate along with your sales and can also be impacted by market conditions.
The sales price (per unit)
The money is charged for every unit that you sell. If you offer many extras/add-ons and occasional discounts, just calculate the average price.
Contribution margin
To calculate the contribution margin, simply deduct the variable costs from the sales price and then divide again by the sales price. So, for a sales price of $3 and costs of $1:
($3 – $1) / $3 = $0.66
Profit & Loss
You learn your profit & loss after discovering your breakeven point. If your sales are the same as your expenses, you’re at 0. If they exceed that number, you’re in profit; if they dip below it, you’re running at a loss.
How to calculate the breakeven point
There are two ways to calculate the breakeven point.
The first is based on units and uses the following formula:
Breakeven point in units = Fixed Costs / (Sales – Variable Cost)
The second is based on total sales volume in a specific currency, such as USD:
Breakeven point in USD = Fixed Costs / Contribution Margin
The former tells you how many units you must sell to hit that all-important breakeven point. The latter focuses on the financial value and is perhaps the better option when selling products with multiple adds-on.
An example of a breakeven point and breakeven calculators
Breakeven calculators are available if you need them, but the above formulas should be easy to follow.
As an example, let’s assume the following…
- Fixed costs = $50,000
- Variable cost per unit = $1
- Sales price = $3
- Contribution Margin = $0.66
…and use it to calculate the unit and USD amount:
- $50,000 / ($3 – $1) = Breakeven Point in Units of 25,000 units
- $50,000 / $0.66 = Breakeven Point in USD of $75,757
Formula for the breakeven point for retailers
As a retailer, you can use the same formulas outlined above when determining a breakeven point. If you’re selling many different products, it’s hard to know how individual products are performing and whether you should be buying more or less of them.
A breakeven calculator, therefore, can provide some much-needed clarity.
When should you do a breakeven analysis for your business?
There are a few times when it makes sense to perform a breakeven analysis, including:
When you start a business
A breakeven analysis can be very helpful when you’re just starting out, but as you don’t have a track record of sales and expense data, you can’t run an accurate calculation. Instead, use whatever public data you can find to create a close approximation. You can also tweak the figures as you grow and create a more accurate breakeven point down the line.
When you launch a new product
Is a new product a good fit for your brand? Is it something that you should purchase again? A breakeven analysis can provide you with answers to these questions. It’ll also give you some insights into similar products, thus helping you with future product launches.
When you are trying to identify a new sales channel
Many business owners have been forced to pivot in the last few years, with world events providing a catalyst for major changes in a number of industries. They have swapped the high street for online retail, dropped high-risk and highly perishable items, and rethought where they source wholesale products.
If you’re thinking about a significant change such as this, a breakeven analysis can help you to recalculate changed expenses and ensure that your planned move is a good one.
Limitations of a breakeven analysis
There are several limitations to using a breakeven analysis.
The main issue is that it can be difficult to estimate marginal costs, so it’s not always helpful if you’re dealing with very fine margins. It also assumes that the cost and sale price remain stable, but that’s rarely the case. Sale prices can fluctuate based on discounts and other special offers while variable costs change according to the order size.
For example, if you order much higher quantities, the price may come down.
Price cannibalization is another concern. It refers to the impact that one product has on another product. So, if you’re selling one type of potato chip and suddenly increase your order size, it may have a negative impact on sales of other potato chips; if you’re selling the latest model of a gadget, it could reduce sales of last year’s model.
Take the guesswork out of cutting costs with Salesorder
It’s always good to know your breakeven point. It’s not a perfect formula, as noted above, but it can serve as a solid backbone for your wholesale or retail business.
For more help in managing your business and driving growth through automation (whether you need to automate your orders or improve your inventory management or forcast your inventory) contact us today.
FAQs
What is a good breakeven point?
Anytime a product line takes you beyond your breakeven point, it’s a positive. Just remember that there are some marginal variables to consider, so while being slightly above your breakeven point suggests you’re heading in the right direction, there is still work to be done.
Is it better to have a low or high breakeven point?
A lower point is generally better, as it suggests that your business is more financially stable and it’s easier to reach a point of profitability.