Working it out
- Fixed costs. What you pay whether or not you sell: rent, salaries, insurance, software and loan repayments. Include your own pay.
- Gross margin. From the gross margin page, as a decimal (40% is 0.40).
- Divide. Fixed costs divided by gross margin.
- Compare. Set the result against your actual sales. The gap, as a share of sales, is your margin of safety.
An illustration
The figures are invented to show the arithmetic. They are not what any business should expect.
| Fixed costs, including R20 000 for yourself | R66 000 |
| Gross margin | 40% |
| Break-even sales | R165 000 |
| Actual sales | R200 000 |
| Margin of safety | 17.5% |
Sales can fall by 17.5% before this business starts losing money. If the margin slips to 35%, break-even rises to about R189 000.
Read it against your own situation
- Last month. Is break-even rising or falling?
- Your plan. Is it the break-even you expected?
- Your sales. How close are they?
What a change could be revealing
| The signal | It could be revealing | Check | You could |
|---|---|---|---|
| Sales are below break-even | Sales have not grown as planned, fixed costs are higher than planned, or the margin is lower than you priced for | Each of the three, against your plan | Work out which one closes the gap fastest |
| Sales are just above break-even | A small dip in sales or a small rise in costs could push you into a loss | How far sales could fall before you reach break-even | Build a buffer before adding fixed costs |
| Break-even keeps rising | Fixed costs may be creeping up, or the margin may be falling | Fixed costs and gross margin, against three months ago | Find which moved and deal with it |
| Well above break-even, but cash is tight | Cash may be stuck in debtors, or profit may be leaving as fast as it arrives | Debtor days, and what you take out of the business | Read the debtor days and runway pages |
| Thinking of a hire or new premises | It adds to fixed costs and so raises break-even | Add the cost to fixed costs and recalculate | Work out the extra sales needed before committing |
Try it
The break-even calculator works in units per day. It does not include your own pay, so add the take-home you need to your fixed costs. The hiring cost calculator shows the full cost of a hire.
Questions people ask
Should I include my own pay in fixed costs?
Yes. Without it, break-even looks lower than it is.
I sell many products. Which margin do I use?
Use your overall gross margin for the month.