Break-even explained: how many must you sell to stop losing money?

Many small traders feel busy but are not sure whether they are making money. A break-even calculation gives a clear answer.

The idea

You break even when your income from sales equals your costs. After that point, each extra sale adds profit.

Two kinds of cost

• Fixed costs stay the same whether you sell a lot or a little, such as shop rent, a monthly subscription or a salary.
• Variable costs change with each item sold, such as stock, packaging and delivery.

The simple formula

First find the profit per item: selling price minus the variable cost of that item.

Break-even number = fixed costs divided by profit per item

An example

Suppose you sell a bag for ₦6,000. The bag costs you ₦4,000 to buy and pack, so your profit per item is ₦2,000. Your fixed costs for the month are ₦40,000.

₦40,000 divided by ₦2,000 is 20. You must sell 20 bags a month just to cover your costs. The 21st bag is your first real profit.

How to use it

1. If 20 is too many for your market, think about a higher price, a cheaper supplier or lower fixed costs.
2. Set a monthly sales target above your break-even number.
3. Review it whenever your costs or prices change.

Remember

Include your own time and transport in your costs, and do not mix business money with personal money.

Written by the EarnNaija team at EarnNaija Digital Technologies. Tips are general guidance, not financial or legal advice.

This article is general information, not financial or legal advice. Earnings are never guaranteed. See our fees page for the exact costs.