Dispatch #59 - A Simple How-to for Calculating Break-Even

How much revenue do you need to cover your costs? It’s called your break-even point, an important number to know during this volatile pandemic economy.

Operate below break-even and the company loses money, eroding its cash safety cushion. Operate at break-even and you’re treading water. The ideal state, of course, is to operate above break-even and build your cash reserves.

A simple way to calculate break-even is to divide fixed costs by gross profit margin (GPM). For example: $250K per month fixed costs divided by 33% GPM means you need $760K of revenue per month ($9M per year) to break even.

It gets a little bit complicated if your company makes monthly term loan payments or monthly “salary” shareholder distributions (common for S Corp owners). Count those as fixed costs but add extra revenue to cover the income taxes on these non-deductible balance sheet expenditures.

Set up a little spreadsheet and add revenue until the break-even point is near zero. In the example below, the balance sheet expenditures moved the break-even point from $760K to $870K per month ($10.4M per year). 

This spreadsheet makes it easy to run scenarios until you find a financial model that works.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.