The E Hustle 37: How to calculate your break even point

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One of the fundamental aspects of running any business is knowing your break even point. In other words, the amount of money you need to make each month, to cover your expenses, and not lose money.

That might seem really basic, however many of the brands that I work with or have spoken to, don’t actually know their break even point, or how to calculate it.

Once you know your break even point, you can focus on scaling way above it - and anything above break even is where the gold lies.

Tip:

Always put your business under the stress test. It’s no good judging your business in its best months, let’s make sure our business is at least breaking even in its worst months.

So here’s a quick hack to work out your break even point.

Look at your average monthly operating expenses. A good way to do this is to look at the average of the last 12 months, and an average of the last 3 months. I tend to use the last 3, as online businesses can change so much, and the last 3 months is the most recent, and therefore often the most reliable data.

Note: Operating expenses are things like marketing, wages, rent, subscriptions, agency fees and so on. Product costs and freight are not included in operating expenses, but rather, they are part of Cost of Sales, which form part of your gross profit calculation.

Next, calculate your gross profit margin. This is essentially your sales (less tax), less your cost of sales, like COGS, freight, merchant fees and so on. 

Tip: 

COGS is not the stock you buy. That goes on your balance sheet. COGS is the cost of each product that you sold, in a given period. The tip is in the acronym, Cost of Goods Sold - not cost of goods bought!

By the way, here’s my hack to work out what your gross profit margin should be.

So let’s say you’ve worked out that your average monthly operating expenses are $100,000 per month, and your gross profit margin is 55%.

Divide your operating expenses by your gross profit, expressed as a decimal.

Example:

$100,000 / .55 = $181,818.

In the above example, $100,000 is the monthly operating expenses, divided by the gross profit margin of 55%, expressed in the formula as .55. The result is $181,818 in sales that this dummy business needs to generate each month in order to break even.

Let’s put that to the test:

Sales	$181,818
Gross Profit at 55% margin	$100,000
Operating Expenses	$100,000
Net Profit	$0

If you find yourself losing money in your business, the starting point is to work out your break even point, and if the sales number to break even is higher than you can realistically do without going on sale during your worst month, then you need to lower your operating expenses to safe point, where the sales number in the above equation spits out a sales target that you can do in your sleep.

If you’re uncomfortable with your break even sales target, then you’re likely to be extremely uncomfortable in your business. Lower your operating expenses to a point that your break even point is achievable, don't be fooled into thinking you can achieve a break even point sales target that you aren’t already consistently achieving.

If you liked this hack, and you want to build the right frameworks for your business, reply to this email with the word ‘Scale’ to find out more. 

Until next week,

Paul

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