The Breakeven of your business is the amount of business you have to sell, bill and collect each month at which you neither lose money or make money.
You calculate it like this – Breakeven = Fixed Costs / Gross Profit Margin.
Fixed costs are expenses you’d have to pay even if you did no business.
Gross Profit Margin is how much you make on each sale once you subtract the direct costs for providing it – labor, materials, sales commissions, and other costs that you incurred as a result of that sale.
The lower you can get your fixed cost and/or the higher you can get your gross profit margin, the lower your breakeven will be ad the easier it will be to make money.
The farther above breakeven you are, the greater your net margin. The farther below breakeven you are, the greater your net loss.
Thank you Larry and thank you for Owners Club !
This is helpful to me, but not in a business sense. I subscribe to Think Daily for Businesspeople, not because I’m in business (because I’m not), but because your teaching in general speaks to me. This is one of those cases…
We all invest our (limited) resources – time, energy, effort, capital (personal or business), creativity, passion, etc. – in SOMETHING each day.
I find that a lot of business principles – the breakeven point, the law of diminishing returns, etc. – apply in any area of endeavor where there’s an investment of resources (or resourcefulness), and that your sharing your experience helps me to ‘think daily’, or at least that day, on how those principles apply and how I’m doing in those areas.
Thanks, Larry. I hope that the return on your investment in these blogs is that teaching others what you know, and caring about how they’re progressing, profits the teacher – of life or business – as much as the student. ?
Many business owners do not understand the relationship between the numbers and therefore don’t have a complete handle on how to use them for guidance. Passing on your wisdom in easy to digest pieces is very helpful. I save ones like this on a word doc and string them together when they are several blogs long so I can refer back to them when needed.
Very helpful! We’re working on all this right now with our IT company. Always appreciate your emails. Thank you for doing them!