Determining your break even point
Hello, I’m Anthony Andrews, co-owner of Twenty23, a men’s haberdashery. We make custom men’s bow ties, hand-crafted here in Lynchburg, VA.
I’ve been given the opportunity to talk to you guys about the break-even point of your business, which is an amazing thing, because that’s the point when you start making money for your company. I started teaching young kids how to start a business through a young entrepreneurs academy which happens to go through the Lynchburg Regional Business Alliance. And through that program, I was thinking to myself, if these kids would like to start businesses, I want to actually do one with them to show them that it could be done. Throughout that process, I always struggled with the financial part. I’ve never been a math person, and so math was definitely my weakness, so me reaching out to a CPA actually helped. In that process, I learned about income statements, balance sheets, profit and loss statements, and of course I learned about your cash flow projection. I think those four statements are very, very important for not only starting your business but also sustaining your company.
So what exactly is a break-even point. Simply, break-even point is when your business stops losing money and starts making a profit. Now of course, 9 times out of 10 if you’re a brand new business, you may not break even for the first year or two, and that’s completely fine. What we like to call it in our business is going in the red. You might go in the red the first or second or even the third year of your business, but once you’re in the black, once you start breaking even, it means that your business can start being its own entity, which means you don’t have to keep putting money into your business. It can be on it’s own. It can grow without you having to put your own personal dollars, or if you have an investor, without them having to put their dollars in, and then there’s also you can reap rewards from that process.
Simply, when people start business, they want to make money. Obviously they’re inspired by other things going on in their community as well. They want to help people. They may have a social entrepreneurship opportunity about them, but they really want to make money. It’s the money you make after you subtract your cost of goods and variable costs. Now roll with me here. You can paint the picture in your mind, just think about it. Your break-even point is your selling price minus your cost of goods sold minus variable costs and you get your gross profit. Now, let me walk you through the process because I’m going to explain to you how it was explained to me, and how I understand it. Keep in mind, I’m not a math person whatsoever. So if I can understand it, you can definitely understand it.
Think about this as an example. You can write this formula down at home if you want to. It’s the fixed costs, fixed costs being anything from insurance to electricity if you have a brick and mortar store, if you have an online store it might be your e-commerce, it might be your hosting price every month. It’s your monthly fixed costs divided by your gross product. Write that down. Fixed costs divided by your gross profit equals your break-even point. We’ll come back to that formula in just a second. I’m going to give you some examples from my end as a bow tie maker and how that actually works.
Let’s pretend that you’re making bow ties with me. We’re in business together, we have a third partner with you. Gross profit of one bow tie happens to be $30. So if my selling price for an example for one bow tie is $40 for sale to a consumer, to a client, but then I minus my cost of goods and variable costs, which happens to be labor, which happens to be interfacing, hardware, fabric, marketing, branding, the boxes, the supplies, everything. You still following me? $40 bow tie I’m selling at a price minus the $10 gives me $30 gross profit. Now I know what you’re saying. Man, Anthony, $30 for a bow tie? You can put that in your bank account! I wish it was that easy. There’s a thing called taxes. Sometimes that will eat you up, especially if you have a consumer product or something that people will love. Let me walk you through this other process because gross profit is not the end. You really want to get down to your net profit. Follow me for a second. Let’s say that I’m selling my product online. I’m going to go through some of the fixed costs I need. There’s insurance, $65 a month as web hosting, taxes is another $130, marketing might be another $117. Internet may cost me $50, and licenses and permits another $25. This is all monthly costs. I don’t have a brick and mortar store so everything is coming out of my home. That comes to a total of $393.50. Do you remember that $30 that we were talking about in gross profit?
Let’s back up for a second. Do you remember the formula that we talked about? Fixed cost divided by gross profit equals your break even point. At $393.50 that we talked about for fixed costs, divided by the $30, I would have to create 14 bow ties a month to break even. Now on that 15th bow tie, that $30 gross profit now comes into my account. Now I can reap the rewards of that. But before that, I have to break even. I have to make some money so I can pay all of those costs – taxes, insurance, licenses, permits, labor, supplies… all of that good stuff. So remember, 14 bow ties I have to produce a month to break even. Are you still following me? Good.
That’s all I have for you – break even point. You can always contact me. My contact information is right here on the screen and let me know if you have any questions, I’d be more than happy to walk you through the process.
About Anthony Andrews
|Date Added||June 29, 2016|
What is the break event point, what does it mean, and how do you calculate it for your business? In this video, Anthony clearly outlines step-by-step everything you need to know about your business's break even point.