Back to Basics: what is ‘breaking even’?

Do you ever wonder how much it takes for your business to turn a profit? Maybe you’re still waiting for that day. Or maybe you’re just curious about where the scales tip.

This is known as the break-even point. It's like a roadmap to profitability - it can show you how much money you need to turn a profit and can help you calculate how much stock you need to sell to get there. Knowing your break-even point is the essential first step to profitability. Our quick and simple guide will explain the basics of the break-even point for your e-commerce business.

So don’t worry; you won't need to be a finance expert to understand this.

What Does ‘Break Even’ Mean?

The break-even point (or BEP) is the point at which your business’ total revenue matches its total costs. When you break even, you're not making any profit - but you're not making a loss either. 

For example, imagine a company selling high-end sparkling drinks. If it takes £10 to make one bottle of drink, they can sell the bottles for £10 each to break even. 

Why Does It Matter?

Break-even points are essential to small businesses in e-commerce when planning ahead. They help you calculate how much stock you need to sell to cover costs. They help you to make more measured and mindful decisions when purchasing or pricing your stock. And you can set more informed financial goals - if your aim is to turn a 10% profit this quarter, you can calculate the prices you need to achieve your goal.

A short example. Say your business is selling handmade scented candles. If each candle costs £8 to make, and you want to sell them for £18, you'll need to check whether the pricing is feasible. You're spending money on website fees, marketing and packaging - all of which add up in the background. The money you make from selling the candles will need to cover these expenses.

Alternatively, if you only have a limited supply of candles, and they still cost £8 to make, you might need to adjust your selling price in order to break even. It's all about assessing the needs of your business and adjusting prices based on stock levels, the current market, and your operating costs. 

This will help you to hit your break-even point – but that should ideally be your baseline. Once you pass the break-even point, you can start to turn a profit!

How To Calculate a Break-Even Point

There's three parts to the calculation: the fixed costs, the variable costs, and the selling price per unit.

• Fixed costs don't change, no matter how many products you sell. These could include paying for a mailing list, or the cost of hosting a website. 
• Variable costs, unlike fixed costs, change based on how many sales you make. These could include packaging costs, product materials, or shipping fees.
• And the selling price per unit is how much you charge for each product. In the candle example, the selling price per unit would be £18.

To calculate your break-even point, use this formula: 

fixed costs / (selling price - variable costs)

Let's use the candle example one more time. The fixed costs (for example, renting a working space, hosting a website and paying for a mailing list) come out to £500 per month. The selling price of each candle is £18. The variable costs of each candle (including ingredients, packaging and shipping fees) come out to £8.

Here, the break-even point is 50 units per month, so you would have to sell more than 50 candles this month to generate a profit. The break-even point is your baseline, so it's incredibly helpful to keep an eye on your stats and sales to check if you're reaching your goal.

This calculation is also known as a ‘break-even analysis’.

How the Break-Even Point Impacts Your Decisions

Knowing your break-even point can help you to make smarter, more informed decisions when running your business.

It helps you check whether your pricing is sustainable: are you turning a sizeable profit or barely breaking even each month? Understanding your break-even point can help you adjust your methods to improve your profit margins.

It guides you to take a closer look at your company finances: where is your money going? Are fixed costs like subscriptions or rentals taking up most of your budget, or could you raise the prices on your products to cover the difference? Thinking about these aspects can lead you to run your business more efficiently.

Finally, understanding your break-even point can influence your marketing goals. If you need 80 sales this month to break even, you might set a goal of 100 sales to build up some extra cash. This helps you to set targeted and attainable objectives.

How Can CloudFO Help?

In conclusion, understanding what 'breaking even' means and how it can work for your business is so important. It gives you a marker to set your goals and plan for future success.

But we know monitoring your finances can be uncomfortable, especially if you're nowhere near breaking even. Many people feel stuck, or want to bury their heads in the sand to avoid the numbers altogether.

Enter CloudFO – the solution to your problem. Your personalised AI finance colleague is designed to help your e-commerce business grow. We integrate seamlessly with your Shopify store, as well as major banking apps, so you can see all your stats in one place, and plan for growth. CloudFO provides you with clear, weekly updates and breaks down complex terms using simple language, so you can always stay informed. We look out for your finances so you can do what you love: running your business and growing your brand.