I’m currently taking a 12-week online business class for women entrepreneurs. Whether you have an Etsy shop, a blog, or another small business, it’s helpful to learn some business basics. I’ve worked for myself for years, but returning to these basics reminds me of some key things that will help me improve my business. Right now we’re working on calculating our break even point. It’s hard! The formula is easy, actually. However, figuring out my own money choices is hard. And working through that has been really good for me.
What’s Your Break Even Point?
The break even point is literally what does it take for you to break even in your business. In other words, you create and sell a product. There are variable costs associated with that, such as the price of your raw materials to make the product. There are also fixed costs for your business, such as rent or the annual fee to run your website. When you make enough in sales to cover all costs, you break even.
How to Calculate Your Break Even Point
First, you need to identify all of your variable and fixed costs. Make a list of them. Variable costs include shipping fees, the cost of materials, packaging costs, wages to employees or contractors, etc. Fixed costs are what you pay monthly: rent, website fees, utilities, phone, etc.
Next, answer these four questions:
- What is your top-selling product or service? What do you charge for that one unit of that item?
- What are your total variable costs to create one unit of that item?
- Subtract answer 2 from answer 1. This is your gross profit per unit.
- What are your total monthly fixed costs?
Break Even Calculation Formula
Take answer #4 from above and divide it by answer #3. In other words, divide your total fixed costs by your gross profit per unit. This gives you a number. That number is how many units of that item you need to sell each month to break even. Use a budgeting app like Simpli to calculate this if you may.
Why This Is So Hard For Me To Calculate
I absolutely understand the concept. I also understand the math. Nevertheless, I’m struggling with this part of the class.
Problem 1: What am I selling?
First of all, I’m trying to pivot my business because I know that I’m not earning enough money. Therefore, I don’t even know exactly what I’ll be selling in the future, making it impossible to determine the cost of my top-selling product. For now, though, let’s just say that I sell articles, since I’ve been a freelance writer for many years. Article costs vary so much but let’s just say that I charge $50 per article to keep things simple.
Problem 2: What are my variable costs?
Well, what are my variable costs for one unit? I have no idea. On one hand, it doesn’t cost me anything except my time to sit down and write an article. On the other hand, for some projects I might use paid-for subscriptions such as a stock photo service. If it’s a complex article, I might have to pay for access to a journal article for my research. That varies so much from project to project.
Problem 3: Which fixed costs count?
Then what about my fixed costs? The only real fixed cost to write an article is my Internet and web access costs. But obviously I had to buy a computer to write on. Wait, is that a variable cost? I work from home and deduct my home office from my taxes, so I guess that’s a fixed cost. It’s confusing.
Big Problem: The Math Doesn’t Work Out
I’ve worked and re-worked this calculation a dozen times. And what happens each time is that I get a negative gross profit per unit. It costs me more in variable costs than I’m charging per article. Obviously, I can’t continue the calculation because there’s no amount of units I can sell to break even.
So, this confirms what I’ve realized all along: my current rates at my current freelance job are unsustainable. That’s frustrating. However, it’s good information. It reminds me that I’m pivoting for a reason. And it gives me a calculation to use as a baseline as I start looking at other products and services that I can offer. If I can find a higher-paying product, such as a course or one of my books, to make my top-selling product, then maybe I can make this calculation work. Then I can break even. And once I can break even, I can grow!
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Kathryn Vercillo is a professional writer with more than a decade of experience writing about healthy living and personal finance. She lives in San Francisco, where she has learned to maximize frugal living tips in order to thrive as a freelancer in one of the nation’s most expensive cities. When she’s not writing, she’s exploring the city on foot with her rescue dog. Learn more about her at www.kathrynvercillo.com. Kathryn also writes about saving money with coupons over at GroceryCouponGuide.com .