Breakeven is the point where your company starts to make a profit instead of a loss. A success threshold if you will. At this point, the company generates as much revenue as it has costs. If you go past it you will make a surplus. Vice-versa, if you drop below it, you will make a loss.
Importance for the Business Plan
Your breakeven tells you how much sales and revenue you need before making a profit. It is of great importance for banks and investors, to know when this point will be reached. Reason being, that the losses have to be compensated until then. A lot of public investors acknowledge that fact by offering grace periods for interest payment.
A typical breakeven occurs between Months 6 and 18, when being funded with bank loans. Everything beyond this timeframe collides with the usual two-year grace period – and has to be explained. Venture capitalists may accept more liberal timeframes, if they perceive the potential outcome to be high enough.
A quick example for a breakeven: Mulled Wine Vendor.
The fee for a stall on the Hamburg Christmas Fair is about 150 €. Sales personnel costs about 200 € per day. Both costs are fixed and will occur regardless of sales.
Now let’s take a look at the variable costs, which occur depending on the number of product sold: A cup of mulled wine costs the vendor about 0.50 €
The vendor sells the wine for 2.50 € per cup.
Result: 175 sold cups are needed to reach breakeven for the day.
In reality, your sales will vary depending on the day of the week. You have to sell 175 cups of mulled wine to compensate for your fixed costs and generate a surplus.
In your business plan, you have to prove that you reach breakeven and that your enterprise is profitable. You do that by showing that you average 175 a day, reaching and surpassing the breakeven as soon as possible. A possible way is looking at how the other vendors are doing business.
Don’t include your own mulled wine consumption though 😉
This example is admittedly simplified: In reality, you would sell several products in different quantities. When writing your business plan, you can easily present that by adding products into product packages, life the typical order of a customer and by estimate the product quantities in the order. The question stays the same though: At which point will your sales surpass your costs and generate a profit.
- When you are negotiating with a bank you should be on top of the topic breakeven. How much will you need to sell until you reach that point? Keep it simple and presentable. Most important is that you understand what it will take to make your business a success. Show that.
- The breakeven provides information on your operational income. Nonetheless, you will have to pay back your loans and fund your private life. The benefit needs to be high enough to do that.
Mulled wine example: Selling 176 cups is ok. It won’t be enough to pay for everything though.
- If you research the break even, you will find countless complicated formulae and types of analysis. Our recommendation: Use your common sense. Set variable and fixed costs against realistic sales and prices. This will give you a first impression. Now put all that into a table and play around with it.