Break-Even Analysis

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Using a break-even analysis, you calculate how much revenue you’ll need each week or month to break even — that is, not lose money. To calculate your break-even number, you need to know two pieces of information: your "overhead" and your "profit percentage.” Overhead includes expenses that don’t vary much each month, such as rent and insurance — you must pay these expenses no matter what is happening in the business.

To determine your profit percentage, start by calculating the total cost of a typical product. For example, if you sold bicycles, the cost would be the price you paid for a bicycle plus any shipping charges or the value of any labor that you spent to repair or tune it up. Let's say that the total cost is $75. Next, subtract that total cost from the selling price of the bicycle. So, if you sold it on eBay for $125, you would subtract $75 (cost) from $125 (selling price), and the difference would be $50. That's your gross profit.

To determine your profit percentage, divide your gross profit ($50) by the selling price ($125). Your profit percentage would be .40 or 40%.

If you sell several different types of products, or make different amounts on each one, you need to average the various profit percentages to determine your business’s overall profit percentage. To improve your accuracy, you should weight your results. For example, if you sell twice as many children's bikes as adult ones, you'll need to reflect that in your average. You can also save yourself some time and just work with the lowest or most conservative profit percentage.

Calculate your break-even by dividing your monthly overhead expenses by your profit percentage. For example, if your eBay bicycle store has fixed monthly costs of $500, and your profit percentage is 40%, then you need sales of $1,250 a month to break even ($500 divided by .40). If this amount is below your anticipated sales revenue, then you’re facing a loss — and you’ll need to lower expenses or increase sales to break even.

by: , Attorney

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