Glossary
breakeven
Also called break-even point, breakeven point, break even
Breakeven is the point at which a business stops making a loss and starts making a profit, because revenue has grown enough to cover all of its costs.
- How it's calculated
- Breakeven revenue = Fixed costs ÷ Gross margin %
- Fixed costs are the ones that do not move with sales volume, such as rent and salaries. Gross margin percent is gross profit divided by revenue. The result is the revenue you need in a period to cover everything.
Breakeven is usually discussed in two forms, and it is worth knowing which one somebody means.
Breakeven revenue#
This is a level of sales. If your fixed costs are £20,000 a month and your gross margin is 60%, you need £33,333 of revenue a month to cover them, because 60% of £33,333 is £20,000. Below that you are making a loss, above it you are making a profit.
The breakeven month#
This is a date, and it is what founders usually mean. It is the month in your forecast where profit turns positive and stays positive. It is more useful than the revenue figure because it accounts for the fact that both your sales and your costs are changing over time.
Why it moves#
Three things push the breakeven month around: selling more, charging more or improving margin, and adding fixed cost. Hiring is the one that catches people out, because a new salary raises the bar permanently while the revenue that hire produces usually arrives later, if at all.