This is the level of sales or gross income that your business must achieve before it can even start to make a
profit. It can be calculated over any time period preferably monthly, weekly or daily. Assuming you are
measuring the monthly breakeven point of your business you will need to know your fixed monthly
overheads. These are the expenses that would be the same whether you opened the doors to trade or not.

Your variable overheads are those expenses that increase as your sale increase. Using your phone bill as an
example the line rental is a fixed overhead but the amount of calls you make in many businesses is a factor of
the amount of sales you make. Many expenses are variable in the long term but fixed in the short term so the
period of time you are analysing can effect your definition of variable or fixed expenses. In the short term the
only variable cost you may have is the cost price of the product you are selling Your breakeven point is
calculated by working out how much gross profit is left after the variable expenses are met and then working
out how much gross profit it will take to cover the fixed costs. The following three examples all say the same
thing it just depends which one works for you:
1) If for every dollar of sales a business makes it spends 50% on variable costs (in the short term this
could mean 100% markup of goods purchased for resale or working back the other way a 50% gross
margin) and this businesses fixed costs are $5,000 per week, it will need to sell $10,000 to breakeven.
2) Sales less variable costs as a percentage of sales (gross margin) tells us that half of every dollar
received goes towards fixed costs so the business needs to sell twice its fixed overheads to breakeven.
Or if the variable costs are only 40% of sales then 60% of sales goes on fixed costs. So every dollar
sold contributes 60 cents to fixed overheads. If you divide you fixed overheads by 60 and multiply the
by 100 you find out how much you need to sell to breakeven.
3) For the number crunchers, that is your fixed costs for the period divided by the percentage of each
dollar sold that contributes to your variable costs (gross margin) multiplied by 100 gives you the sales
required to breakeven.
Fixed Costs
------------------- x 100
Gross Margin
Now consider how many days in that particular period it would normally take you to meet your breakeven
point. Are you cutting this too fine? For ideas on how to improve your breakeven point refer to Chapter 5 of
Driving Small Business.