Your breakeven is how much business you have to do each month to pay fixed expenses before you make a profit. If you sell and deliver your breakeven each month, you just pay your bills and make NO profit.
Calculate your breakeven this way.
Fixed Costs/Gross Margin = Breakeven.
Fixed costs are ones you have to pay even if you do NO business. Rent, insurance, utilities, loan payments, and payroll – besides sales commission and labor cost tied directly to producing what it is you produce (office staff for example).
Gross Profit Margin is the sales price of what you sell less the cost of materials, sales commission, and labor tied to producing and delivering the product. (So if I sell a widget for $100, and it cost me $10 in sales commission, $20 in labor and $30 in materials, my direct costs are 60% and my gross margin is 40%).
So if your fixed costs were $15,000 a month, and your gross margin was 40%, your breakeven is ($15,000/.4) $37,500 per month.
If you cut $2,000 of fixed cost per month, how much will it bring your breakeven down? $13,000/.4 = $32,500. So by cutting $2,000 of fixed cost per month, you have to sell and deliver $5,000 less to start making a profit.
Wow!
What if you then cut direct sales cost by 2% to bring your gross margin up to 42%?
$13,000/.42 = $30,952 breakeven each month. We’re getting better – more efficient and easier to make a profit.
Do you see the relationship between fixed costs and gross margin? How does this affect your decisions to add overhead and other fixed costs?