Know your break-even point
This Break-even point Info Guide explains what break-even point is and why it pays to know 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 this point you are making a loss.
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Making sales may incur direct costs such as purchases of food, beverages and other goods for resale, 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 - for example insurance, rates and bank interest.
Contribution
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 Hostel Example
- Fáilte Hostel attracts 20,000 guests in a year, each paying approximately €28 per night, including breakfast.
- Excluding VAT at 13.5%, the income to the hostel is approximately €25 per person.
- The cost of breakfast works out at €4 per person, while kitchen help, room cleaning and other costs are €6 per person. Most guests avail of breakfast at the hostel.
A year's trading picture would look like this:
Fáilte Hostel - Profit and Loss Account
|
| |
€ |
|
| Sales (excl VAT) |
500,000 |
20,000 guests @ €25 each (excl. VAT)
|
| Less - direct costs: |
| Food |
80,000 |
Purchase cost of breakfast materials
|
| Staff / other costs |
120,000 |
Kitchen / room cleaning assistance etc
|
| Contribution towards fixed costs and profit |
300,000 |
Contribution = 60% of sales
|
| Less fixed costs: |
250,000 |
Includes staff costs (full-time), rent, insurance, rates, advertising, electricity and heating, repairs and bank interest
|
| Profit |
€50,000 |
|
| |
At what level of sales is the Fáilte Hostel making neither a profit nor a loss, ie what is the break-even point for this business?
This formula is used to calculate break-even point:
The Fáilte Hostel needs to achieve €416,667 sales value in order to avoid making a loss, or 16,667 guests in a year (each paying on average €25, or €28 including VAT). During a recession this hostel owner knows that sales would have to fall by over €80,000 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 the Failte Hostel aims to earn a profit of €100,000, the required sales level is:
This hostel owner must aim for 23,333 guests (each paying an average of €25, or €28 including VAT) in order to achieve a target-profit of €100,000.
Quick Break-even Point and Target-profit Calculator
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