Break-even

Also called Break-even point, Breakeven

The level of sales at which you stop losing money and start making it. Knowable to the pound, and most owners have never worked it out.

What it means

Your break-even point is the amount you have to sell in a period to exactly cover all your costs — the direct ones and the overheads — leaving a profit of zero.

Below it you are consuming cash. Above it, every extra sale contributes at your gross margin rate.

Why it matters

It converts a vague worry into a target. "Are we going to be all right this month?" is unanswerable; "have we billed £20,000 yet?" is answerable by lunchtime.

It is also the number that tells you what a new cost really costs. Taking on a £2,000-a-month unit at a 40% margin means finding £5,000 a month of extra sales just to stand still.

What it looks like in practice

Monthly overheads ÷ gross margin % = monthly break-even sales.

£8,000 of overheads at a 40% margin: £8,000 ÷ 0.40 = £20,000 of sales.

Put it on the wall. Track it weekly, not monthly, because a month is too late to change anything about that month.

What to watch out for

Forgetting your own wage. If the owner's living costs are not in the overheads, the break-even figure describes a business that keeps its doors open while its owner goes broke.

Forgetting tax and loan capital repayments. Neither shows up in profit — the interest does, the repayment of the loan itself does not — and both still have to be paid out of cash.

Where to get proper advice

Any accountant or bookkeeper will calculate this with you in half an hour from figures they already hold.