Break Even Point Formula
A business is said to break even when its revenue equals its expenses and the net income is zero. It is useful to be able to calculate the revenue needed for a business to break even, and to do this the break even formula is used.
To use the break even formula you need to obtain values for the gross margin percentage and the fixed costs.
Using your latest set of accounts or forecast you first need to calculate your gross margin percentage as follows:
- Take your current revenue figure (say 200,000).
- Total your variable costs (say 80,000). Variable costs are those that only happen if a product is produced and sold e.g manufacturing costs.
- Subtract the variable costs from the revenue figure to give a gross margin (200,000 – 80,000) = gross margin = 120,000.
- Divide the gross margin by the revenue figure to give a gross margin percentage (120,000/200,000)= gross margin percentage = 60%.
Using the Break Even Formula
To use the break even formula and to calculate break even you now need to proceed as follows:
- Total your fixed costs (say 96,000). Fixed costs are those which happen whether you sell anything or not e.g office costs.
- Divide your fixed costs by the gross margin (96,000/60%) = break even revenue = 160,000.
What the break even formula is saying is that at revenue of 160,000 and a gross margin percentage of 60% you make a gross margin of 96,000 (160,000 x 60%) which covers the fixed costs of 96,000 to give a net income of zero. Any revenue above 160,000 will result in a profit, any revenue below 160,000 will result in a loss.
Break Even Formula Download
The Excel sheet, available for download below, uses the break even formula to calculate break even point for you by inserting values for revenue, variable costs, and fixed costs.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.