what does it mean to “break even” in finance/business
In: 0
The amount you made is equal to the cost. There are different types of breaking even.
Say a taco costs $5 to make, if you sold it for $5, you broke even on it.
If your monthly expenses are $500 and you made $500 in revenue, then you broke even on that. You didn’t make any money that month but you didn’t lose any either. If you only sold $400 with of stuff you’d have lost $100.
There’s a thing called the break even calculation. Which is how much of a thing you’d have to sell so that you don’t lose any money. It takes in your fixed costs, and variable costs and the price you sell it for.
Let’s say you have a taco truck. You’re going to spend $200 a driving around in gas regardless of how many tacos you make. Insurance on your truck costs $100 a month. A taco takes $2 to make in ingredients.
So you have $300 in fixed costs, and a variable cost of $2 per taco. Let’s say you’re selling those tacos for $5.
The formula is: fixed costs / (sell price – variable cost)
Or 300/(5-2). Which is 100. So you would have to sell $100 tacos to break even and not lose any money. If you sell 101 tacos, you’ve now made money.
If you change the price to $10, it becomes 300/(10-2) or 300/8. You would need to sell 37.5 tacos before making a profit. The question is if you could convince 38 people to buy a taco at $10 vs 100 for $5.
And let’s say you don’t know the price, but you know you can make 60 tacos a day. You can determine the minimum amount to sell for with the calculation:
(Fixed costs / number of units) + variable price.
(300/60) + 2. Which is 7. So at a minimum you would have to sell your tacos for $7 to break even making 60 of them. If you can’t do that, then your business currently isn’t profitable.
Latest Answers