What do you need to calculate BEP?
“OK, Ignite Spot, I’m ready to dive in. How do you calculate a break-even point already?!” Just a few more details to remember—we promise. With all of the expenses that come along with running your business, it can be intimidating, but you only need three things to calculate your break-even point: gross margin, overhead costs, and balance sheet payments.
1. Gross Margin
Your gross margin—or gross profit margin—is your company’s net sales minus the costs of producing your goods and services. It includes how much profit you make before you subtract selling, general, and administrative costs.
Example: Pretend your gross margin is 89 percent. This means that for every dollar you sell in products or services, you get to keep 89 cents to go toward your company’s overhead costs.
2. Overhead Costs
Overhead costs are the operational costs that you incur within your business regardless of how successful you are. Rent, insurance, administrative payroll, and marketing all fall under overhead. Add up every dollar that you spend each month to see your total overhead costs.
Pro tip: Most people cut out marketing, which is a big no-no. They do this because if things get bad, marketing is often one of the first things to go in order to save money. That’s a big mistake! Calculate your break-even point with the marketing budget built in so your company can grow.
Example: Let’s pretend that you have $25,000 in overhead costs.
3. Balance Sheet Payments
Balance sheet payments are monthly expenses that are not classified as an expense in typical accounting terms. The principal portion of loan payments, payments to investors and shareholders, and owner draws are all examples of balance sheet payments.
Example: Let’s pretend you take a $5,000 owner’s draw from your company each month and an additional $2,000 you need to pay in principal payments on debt. As a result, your balance sheet payments are $7,000.