Breakeven - What does breakeven mean? Read more here
Learn what breakeven means and how you can calculate it for your business. Gain insights into how the breakeven point helps you understand the financial health of your business and plan for profit
Discover how to calculate your breakeven point and optimise your business finances
What does breakeven mean?
The breakeven point is a crucial concept in economics and accounting, referring to the point at which a company's revenues exactly cover its costs. In other words, it is the point where there is neither profit nor loss. For a webshop or any other business, knowing the breakeven point is essential for planning and managing finances effectively.
Breakeven in an accounting context
In accounting, the breakeven point is used to determine how many units must be sold to cover all fixed and variable costs. It helps businesses understand their cost structure and revenue requirements, which is essential for budgeting and financial planning.
The breakeven point can be calculated by dividing fixed costs by the difference between the selling price per unit and the variable cost per unit. This difference is also known as the contribution margin per unit.
Breakeven calculation in practice
Let’s look at an example to better illustrate how the breakeven point is calculated in practice.
Example:
Suppose you run a webshop that sells t-shirts. Your fixed costs, which include warehouse rent, salaries, and other administrative expenses, are 50,000 DKK per month. Each t-shirt sells for 200 DKK, and the variable costs (production, packaging, shipping) per t-shirt are 100 DKK.
To find the breakeven point, we first need to calculate the contribution margin per t-shirt:
Contribution margin per unit = Selling price per unit - Variable costs per unit
Contribution margin per unit = 200 DKK - 100 DKK = 100 DKK
Now we can calculate the breakeven point:
Breakeven point (units) = Fixed costs / Contribution margin per unit
Breakeven point = 50,000 DKK / 100 DKK = 500 units
This means you need to sell 500 t-shirts per month to cover your costs and reach breakeven. Any sales beyond that will contribute to profit.
Learn what breakeven means and how you can calculate it for your business. Gain insights into how the breakeven point helps you understand the financial health of your business and plan for profit