Q: What is a 'break-even point'?
Feb 17 2010
Answered by: Marc Barber Ask a question
Your break-even point is the point at which your business is making the right amount of sales to give you enough profit to cover your overheads, which include rent and rates, heating and lighting. Sometimes employee costs are overheads and sometimes they are not. It all depends on what they do. If what the employee does is related to the level of sales, their costs will be called direct and are not part of overheads. Examples would include staff whose time is paid for by customers, or employees who are directly involved in making a product. But if the employee’s job is something like accounting, marketing or general clerical duties, their costs will be included in overheads. In your business there may be a grey area in which it is difficult to decide whether the employee’s costs are direct or not.
The purpose of finding your break-even point is to work out how many extra sales you need to make to cover the cost of your new employee.
Finding your break-even point
First, you have to find what your gross profit margin is. This is your gross profit as a percentage of sales. You work out gross profit by deducting the amount of your direct costs from the value of your sales. Direct costs will be the purchases you need to make to supply your services or product and the costs of any labour directly associated with your sales.
Once you have worked out your gross profit margin, your second step is to work out the amount of your overheads (for example, rent, rates, heating, lighting, telephone costs, professional fees or labour costs, such as secretarial or book-keeping).
To find your break-even point, your third step is to divide the amount of your overheads by the gross profit margin. This will give the level of sales you need to make to cover your overheads.
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