It’s important to know what point your sales will cover all your goals. However, it’s not always easy because there are two types of costs: fixed costs and variable costs. To see my earlier KPI post, check it out here.
Fixed costs stay the same, whether you sell well or terribly. For instance, a real estate broker pays rent. If their office sells zero houses, the rent is the same as if they sell 20 homes.
Variable costs go up as we sell more, but decrease as we sell less. To continue our real estate example, it could be listing in realty magazines for marketing, or paying for real estate photography or staging if the market is really competitive. Oh, and COMMISSIONS, right? When you list more homes for sale, you have to pay more for these things to complete the sales process.
Explanations aside, how do we actually calculate breakeven?
How to calculate YOUR break even point
First, add up your fixed costs. That’s the easy part. If you read an earlier post of mine about how to do cash flow projections, it’s no problem. Otherwise, just add up every cost that stays the same no matter how your business does.
Let’s say your annual fixed costs are $4,500. To keep this short I’m not going to list them all.
Let’s say the average home sale gets you 3,000 in commissions in this market. Variable costs per unit sold are $1500 for agent commission and $500 for listing advertisements and photography. We now have enough information for a new word: Contribution Margin.
Contribution Margin (CM) is how much each sale CONTRIBUTES to covering your fixed costs.
CM = 3,000 – 2000 = 1,000
Because you’re super responsible, you won’t take profits until the sales cover your fixed costs. Now we can calculate Breakeven in Units. How many do we need to sell to cover our fixed costs? What is the Break-Even Point (BEP)
BEP (Units) = 4500 (your monthly fixed costs) / 1000 (your CM) = 4.5 (let’s round up to 5)
Your office needs to sell 5 homes before you cover your fixed costs.
But how much money do I need to make?
Now that we know our break-even point in units, this is easy. You divide your fixed costs by your Contribution margin ratio. I’ll do it for this example here:
CM Ratio = $1000 (Contribution margin) / $3000 (how much you get from 1 sale) = 0.333
BEP ($) (or how much money it takes to break even) = 4,500 (fixed costs) / 0.333 (CM Ratio) = $13,500.00
This number is between 4 and 5 sales. Because you’re a smart reader, you probably already figured that out, though.
Breakeven is helpful when you’re starting a business and making plans. It’s also a great goal when you’re taking over a business in a bad situation and trying to get it out of the hole. This is a private number though; aim for something more ambitious with your people.
To have me as your bookkeeper, schedule a free strategy call with me. We’ll talk about your business goals and how my services can increase the value of your time while giving you back more of it. In most cases 80+ hours/year.