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Let’s say that your fixed costs of running your business for a year total $50,000.
Fixed costs are those costs that represent your business base, regardless of whether you turn up for work or make a sale. They include commitments such as rent, leases, admin, power, office costs, and interest on borrowings, but it excludes depreciation because that is a non-cash expense.
Now let’s assume that last year you made $180,000 in sales at a gross margin of 25%.
Gross margin is what’s left over (expressed as a % of sales) when you subtract from your sales, the cost of making those sales. It includes costs that are directly associated with the manufacture and selling of your product and service (e.g. time, materials, other manufacturing costs, the cost of paying sales staff, other marketing costs etc). If you do these things, don’t forget to add in the cost of your own time. It is not free!!
The breakeven sales calculation = Fixed costs / Gross margin %
In this case, breakeven sales = $50,000 / .25 = $200,000
Therefore, you needed $200,000 in sales to breakeven, and you achieved only $180,000. You needed another $20,000 in sales. As a result, your bottom line will be a loss of $5,000 i.e. ($180,000 x 25%) – $50,000
The calculation is simple but it might take you a little time to gather together the right information to perform the calculation. In my next post I will show you the real power of knowing your ‘breakeven’.