Know your break-even point
This Know your break-even point Info Guide explains what break-even point is and tells you how to calculate your break-even point.
Your break-even point is the level of sales at which you are making neither a profit nor a loss. If sales are achieved above break-even point, you are making a profit; below that point you are making a loss.
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Making sales incurs direct costs such as purchases of food, as well as staffing costs for room cleaning and breakfast preparation.
Where there are no sales, these costs are not incurred. However, certain costs such as fixed costs or overheads are incurred irrespective of sales, eg insurance, rates and bank interest.
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Overheads
Sales, less direct costs, provide a contribution towards those overheads. Once overheads are covered, any remaining cash is your profit. If that contribution is below the value of the overheads, you are making a loss.
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Break-even point: Fáilte Guesthouse Example
Background information
- Fáilte Guesthouse attracts 2,500 guests in a year, each paying approximately €68 per night.
- Excluding VAT at 13.5%, the income to the Guesthouse is €60 per person.
- The cost of breakfast works out at €8 per person.
- Kitchen help, room cleaning and other costs are €10 per person.
A year’s trading picture would look like this:
Failte Guesthouse - Profit and Loss Account
|
| |
€ |
|
| Sales (excl. VAT) |
150,000 |
2,500 guests @ €60 each (excl. VAT)
|
| Less - Direct Costs |
20,000 |
Purchase cost of breakfast materials
|
| Staff / Other costs |
25,000 |
Kitchen / room cleaning assistance etc
|
| Contribution towards fixed costs and profit |
105,000 |
Contribution = 70% of sales
|
| Less - Fixed Costs |
70,000 |
Includes staff costs (full-time), insurance, electricity, electricity and heating, repairs and bank interest
|
| Profit |
35,000 |
|
| |
This formula is used to calculate break-even point:
Fáilte Guesthouse needs to achieve €100,000 in sales value in order to avoid making a loss, or 1,667 guests in a year (each paying on average €60, or €68 including VAT).
This Guesthouse owner knows that sales would have to fall considerably before serious financial difficulties are encountered.
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This formula is used to calculate the level of sales needed in order to earn a target-profit:
If Fáilte Guesthouse aims to earn a profit of €45,000, the required sales level is:
This Guesthouse owner must aim for 2,738 guests (each paying on average €60, or €68 including VAT) in order to achieve the target-profit of €45,000.
Quick Breakeven Point and Target-profit Calculator
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