SalevaWhat break-even means
Your shop has two kinds of cost. Some go up and down with sales: the stock you buy to sell. Others arrive every month whether you sell a lot or a little: rent, wages, electricity, the phone bill. Your margin on each sale is what is left after paying for the stock, and that money has one job before anything else: to pay those monthly costs. Break-even is the level of sales at which it exactly does. Below it, the month runs at a loss; above it, every extra sale adds profit.
sales needed = monthly costs ÷ (average margin ÷ 100)
sales per day = sales needed ÷ days open
How to use it
- Enter each monthly cost. For bills that come every few months or once a year, divide by the number of months they cover and enter the monthly share.
- Enter what you need to take home yourself. Leave it out if you only want to know when the shop stops losing money; include it to see what it takes to pay you a living.
- Enter your average margin. If you are not sure, the next section explains how to find it.
- Optionally enter what you actually sell on an average day to see whether you are above or below the line.
Finding your average margin
The margin to use is gross profit divided by sales, over a period long enough to be typical, such as a month. If your records show sales of 500,000 in a month and the stock you sold cost you 410,000, your gross profit is 90,000 and your average margin is 90,000 ÷ 500,000 = 18%.
If you do not have those totals yet, you can estimate: take your ten or twenty best-selling items, work out the margin on each with the profit margin calculator, and lean towards the margin of the items that sell most. Be careful not to use markup by mistake. A 25% markup is only a 20% margin, and using 25 here would make break-even look lower than it really is.
Worked example
A grocery shop pays Rs 40,000 rent, Rs 30,000 to one helper, Rs 12,000 in electricity and gas, and about Rs 8,000 in other costs. That is Rs 90,000 a month. Its average margin is 18%.
- Sales needed per month: 90,000 ÷ 0.18 = Rs 500,000
- Open 26 days: 500,000 ÷ 26 = about Rs 19,231 a day
The owner also needs Rs 60,000 a month to live on. Monthly costs become Rs 150,000, and sales needed rise to Rs 833,333 a month, about Rs 32,051 a day. That second figure is the honest target: a shop that only breaks even is paying everyone except its owner.
Now suppose the shop raises its average margin from 18% to 20%, for example by reviewing prices that have not kept up with supplier increases. With Rs 90,000 of costs, break-even falls from Rs 500,000 to Rs 450,000 a month. Small changes in margin move the target a long way, which is why it is worth knowing both numbers.
Common mistakes
- Counting stock purchases as a monthly cost. The cost of stock is already taken care of by the margin. Adding it again double-counts it.
- Leaving out the owner's own pay. If you work in the shop all day, your time has a cost. Leaving it out makes the shop look healthier than it is.
- Forgetting irregular costs. Annual fees, festival bonuses, repairs and equipment wear out over time. Give them a monthly share.
- Using takings instead of margin. Selling 20,000 a day does not mean 20,000 a day to spend. Only the margin part is available for costs.
Tips for small shops
Work this out again whenever rent, wages or electricity change, and check it against the season: many shops have busy months that carry the quiet ones. Write the daily target somewhere you see it, and compare it with the day's takings at closing time. If you are often below it, there are only three levers: sell more, raise the average margin, or cut a monthly cost. The calculator lets you try each one and see which makes the biggest difference.
Questions
Is break-even the same as profit?
No. At break-even the profit is exactly zero: every cost is paid and nothing is left over. Profit is what you make on sales above that line.
Why does a higher margin lower the sales I need?
Each sale leaves more money towards the monthly costs, so you need fewer sales to cover them. With 90,000 of costs, an 18% margin needs 500,000 of sales; a 20% margin needs 450,000.
My margin is different on every product. Which one do I use?
Use the overall average from your records: total gross profit divided by total sales. It already reflects how much of each item you sell.
How many days open should I enter?
The days the shop actually opens in a typical month. A shop closed one day a week is open about 26 days.
Related reading
- Sales history, expenses and reading your reports
- How to manage inventory in a small shop without spending your evenings counting
- Seven billing mistakes that quietly cost a small shop money
Saleva does this automatically from your sales and expenses: its reports show gross profit, expenses and net profit for any period, so you can see where you stand against break-even. Get the free Android app.