On Episode 40 of The Business Made Easy Podcast I give you an in-depth look into what the break-even point is in your business, how to calculate it and why it’s so important to growing your business and taking your profit to the next level.


  • Discover what is “Profit Margin” in your business and why it’s important.
  • Learn how to calculate your Break Even point and exactly what it is.
  • Examples of adjustments that can be made to improve profits margins on individual sales passed your Break Even point.



(0:00) Jason Skinner: You’re on episode 40 of The Business Made Easy podcast. Let’s
do this Mia!
Mia: Thanks, Jason. You’re on the Business Made Easy Podcast, where we make
business easy. Here’s your host, Jason Skinner.
Jason Skinner: G’day and welcome to the Business Made Easy podcast where we make
business easy. Jason Skinner, your host here for another week of the podcast and I’ve
just literally got back from a three-week holiday and this is my first recording since
being back.
So I’m glad to be back in the seat with you and here to help you navigate the sinkhole
business. I hope you’re all well out there, whatever you’re up to um. I’m certainly
feeling on top of the world after, after having that good break. I didn’t realize just how
much I needed to down the tools and hit that reset button. It really did make a
difference to um to how I was feeling or just up to, up to the break I was feeling a bit
under the pound. I had a lot to do, you know what it’s like in that last week just before
you, you’ve got a deadline or you’re going on holidays. Usually happens around
Christmas as well but you seem to get so much happen in that last week and you also
power, seem to power through so much of that work too. And it’d be great if we could
do our work in those sprints but I hope you’ve had a holiday recently where you’ve got
a holiday planned. Remember to um, we really got to make sure as business owners
that we do take that time out to hit the reset button. I know I’m guilty of it myself, not
doing it enough and um it certainly does make a difference to your mindset and the way
you approach things, you just clear out in your thoughts and things just don’t seem so
burdensome when you’re on a, when you’ve had a bit of a break.
So hope you’re well whatever, whatever you’re up to out there in businesses pumping
along for you. If you’re new to the show welcome, I’m glad you’re here and don’t forget
to hit that subscribe button on iTunes or the device of your choice. Make sure that
you’re um, you uh you’re getting each weekly episode as we bring them out to you as
well. Before we get into today’s episode (2:00), and it’s just, just me today. I don’t have a
guest today. I’m gonna, I’m gonna be talking about a bit of a technical um subject today.
We haven’t spoken about numbers for a little while, so I thought we’d go back and just,
just touch on some of those, some important numbers that I want you to have a look at
in your business, if you’re not already looking at them.
But I just want to congratulate the three winners of our Pat Flynn Will It Fly
Competition. Um you may have known we, we had a – we ran a competition a few
weeks back now to um give away three autographed uh copies of Pat Flynn’s Wall
Street best selling Wall Street Journal Bestselling book, Will it Fly and um and that was
to celebrate uh Pat coming on the show, that was back at episode 35 Pat came on the
show. And if you haven’t uh listened to that yet it’s a, it’s a great episode to listen to. He,
he shared some real gems but our three winners um who entered the competition, we
had an enormous amount of entries and thank you, everyone, for entering and uh that
we had three winners. And we’re sending out those autographed copies of Pat’s book
now, so you should- if you haven’t got them already you shouldn’t be too far away for
Alrighty. On to today’s episode, now we’ve got a tech, number technical episode this
week. And I apologize in advance, I’m gonna make it as simple as possible to go through.
It’s been a while since we had a, looked in any number crunching in, in business. So I
thought it might be an appropriate time. We’ve been looking at a lot of marketing and
things like that. But it’s no point going it and doing all that marketing if we’re not
looking at the actual end results and looking at the right numbers in our business and
key performance indicators within our business. Um you know we, we could just be
generating more and more business but not actually making any more money. So we
don’t really want to do that, it’s about making business easy that’s the name of the
So um I want to talk to you about a number that is critical to know your business but
don’t feel bad if you don’t know it because (4:00) about 90% of business owners don’t
know what this number is. They got a rough idea but they wouldn’t be able to tell you if
I asked them you know what’s your break-even point and that’s the number we’re
gonna look at today, the break-even point of your business. And we’re gonna to go over
exactly what that is, I’m gonna to take you through why it’s important to know what it
is and we’re gonna to take you through how to, most importantly how to calculate it
and then what to do once you know what that number is to improve it. Because it is a
moving number, it is a variable number so, so it will change as your business costs and
environment changes um then this number will also change.
So this is a number that you don’t just sort of calculate once and then that’s it, you lock
it in. It is a number that I do want you to look at regularly and um to make sure that
you’ve known where you’re at and that you are on track to actually be making
the money that it should be making. Because the critical thing of business is it’s not
about just going and getting more and more sales and that’s what you’ll see out of
today’s case study. We’re gonna use a case study to illustrate the break-even point but
today’s case study you’ll see that just going and getting more sales is not really always
the best thing that your business needs to be making more money. In fact, I’ve seen
many cases over the years where um more sales are actually hurting the business and we
actually don’t need more sales, we just need more profitable sales or better types of
sales coming in the business and reducing our cost etcetera um in accordance with
So we’re gonna talk about a case study today, we’re going to use Jane um. Now this is a
fictitious name and a fictitious sort of circumstances but it’s based on real facts and uh I
just like to use a case study because I just think it gives a more practical application
particularly over the podcast medium where I’m not sitting in front of you illustrating it
on a whiteboard. Um with the case study at least we can go through um (6:00) some
facts, so let’s look at Jane’s story and here break even dilemma.
So when Jane came to me and she still does, Jane had a coffee shop in a shopping
center, so a typical coffee shop making coffee, cakes, lunches, all those sorts of things
and she had- in this, it was at a large shopping center. So like a normal commercial type
um shopping center, she had three casual staff uh helping her. So they were coming in
and she’s and the busier she got she’d, she’d put more. She’d give them more hours and
employ them more, she’s paying as in shopping centers always seems to happen. Higher
rent to a landlord, so she was paying fairly significant rent to a landlord, so this was a
burden for her. She, she was locked in to a lease with the landlord so she really had to
get up every day and go to work in the, in the shop and um. I guess as most businesses
do she was just working tirelessly to sort of make a living. She was getting up and going
to work each day, opening the coffee shop and really just focusing heavily on getting
more customers at the door because she felt the more sales that she got and the more
customers coming through, then the more money she was gonna make at the end of
the day. And um that would sort of give her more free time to not have to work so hard
So she was really on this hamster wheel, I’m sure a lot of you can relate to this. I know I
can you know you’re just at times when you’re trying to get going or get started or you
know, you hit hard times in your business. You really need to dig deep and you just feel
that getting more customers in the door is, is the only answer to getting out of the
dilemma that you’re in and that’s, that’s where Jane was.
But what was happening was she wasn’t actually getting the bang for the buck if you like
out of the extra work that she was putting in. The more sales and customers you would
get in it just didn’t seem (8:00) to be I guess seeing the results in her bank account.
They, they just weren’t there, she was she was being nice, she was doing
advertising, social media, marketing, she was you know doing all those things that we’re
told to do and attract new customers to the shop and Instagrams and all those um
things to get new business in. But the more business you got in really wasn’t resonating
and showing more profit in her bank or more dollars in her bank account at the end of
the day. And I, and I liken it to putting more petrol on fire or fuel on fire if you like,
you know there’s a fire burning there and she’s trying to get more um put the fire out
but uh, but she’s putting petrol on it instead of water. So you get  the idea of
what was going on there so.
I sat down with Jane and she was in a bit of despair but set the hour and said, “Look.
Where- what sort of margins um are you making in your business at the moment? Do
you know what your margins are?” And she looked at me with a stone cold face as if to
say, “What do you mean margins?” I know that um uh you know I sell coffee for X
dollars but she didn’t really know out of each coffee that she made uh or sold what sort
of profit she was making out of, out of that um out of that coffee. And it’s important to
know at this point it does apply whether you’re online business or a bricks and motor
business, it doesn’t matter what sort of business you’re in. This sort of- this case study
isn’t just specific to coffee shops, it’s to any business. You should know these numbers,
so when we’re talking about margins, we’re talking about what’s left after you’ve paid
for the goods that you have uh purchased to actually make that sale.
So in Jane’s case, being a coffee shop she needs to buy coffee, she needs to buy um, she
needs to pay her staff uh all those things to make her sales um. (10:00) Bread and
sandwiches and all cakes etc, all need to be purchased. So that’s what we’re talking
about margin, what’s left um after those things are sort of paid for so that was the first
problem we had to overcome with Jane. And then the, the- I guess the next thing was
to, to know um was I said to Jane, “Do you know at what point your business breaks
even? Do you know what sort of dollar value your business has to make to actually
cover all your costs.” And precisely what we’re talking about today, she didn’t know
what that number was. Now, there’s a number of ways you can calculate a break-even
point and what we do, we sat down with Jane and we got her financials, we got her
financial statements and we looked at them and analyzed them.
And as, basically started with her by explaining exactly what a break even point was of
her business. And when we’re talking about break even point, what we’re talking about
is at the point that the next dollar in sales covers all your fixed cost of your business,
plus the cost of actually making those sales, the variable costs. So there are two critical
numbers, now don’t um worry if I lose, if you’re driving in the car right now and um it
doesn’t, and, and you’re losing track of me don’t stress. I’ve got a worksheet that you
can um do some graphs to, to show you exactly how this all works and comes together
but um. Basically, I mean the way Ja- when I sat with Jane worked out her break-even
point she was pretty well needing to make about $514,000 a year in actual sales, dollar
value in sales. So quite a bit of money and, and she wasn’t making I guess much more
over that in terms of um (12:00) of her business performance. So it was, it was quite
right for her to feel that she really wasn’t making the money for the work she should be
putting in. So I showed Jane how to calculate the break-even point and there’s a
number of ways you can do it. When I do it with clients, that’s when I sit down with
clients and work out their break-even point. I have sort of fairly involved uh software
and uh tools that I used to calculate this and it’s a lot more accurate but today, for
today’s exercise being and being um I’m not here with you. So I’m going to give you a
rule of thumb calculation that you can quite easily and quickly use to calculate what
your exact break-even point is of your business.
So um this way you’ll get, be able to at least look at it as a guide and see where you, and
use it on a regular basis to use it as a metric to measure the performance. But the rule
of thumb calculation uh that I use and I’m going to share with you now is you just need
to have two, two numbers. You just need to know two sorts of critical numbers to work
out this formula and the first number you need to know is your total fixed costs for the
period of um that we’re looking at. So if we’re, if you’re new to this and you haven’t,
you’re not doing regular, quarterly sort of financials or anything like that.
So you’ve only got financials from the accountant that they prepared last year to do
your tax return, grab those that’s a good starting point. At least you’ll be able to work
through those and get, get these numbers. So we might just base it on an annual basis,
although I do recommend doing it quarterly at the least. But if that’s all you’ve got,
you’ve just got the numbers from your accountant last year. Now we’re going to talk
about that in a second but grab those and, and we can just use those uh as the starting
So what you want is your total fixed cost for the year. Now, your fixed cost- when we’re
talking about fixed cost, we’re talking about costs that you’ve (14:00) incurred or
you’ve got to, got to spend this money before you even make a dollar of sales. So it
doesn’t matter how much money you make in sales, you’re going to have these fixed
costs regardless and a great example of that is rent. The rent that you pay to your
landlord if you’re, if you’re leasing a premise in your business, that is a fixed cost
because before you get out of bed you are going to incur that cost no matter what in
your business. And um that’s, that’s a fixed cost uh other types of the fixed cost will be
insurance um you know you’re gonna pay an insurance premium to cover your business
for the year. That’s a fixed cost, so anything that you are going to spend money on
because you have that business before you even make a sale. And we want to, we want
to understand what those costs are, so that’s the very first thing. So you grab those
financial statements that you’ve got and you work through and I would just go through
them and just put a little F next to each one. If you see your rent there, just put an F
next to it and then we’re going to add up all the S and get a total of the fixed cost of
your business for the year.
The next number we want to ascertain and this is a little bit more involved but I’m going
to try to explain it in as, as simply as I can is your gross margin percentage. Now, it’s not
as scary as it sounds but what we’re talking about when we’re talking about your gross
margin percentage is that we’re gonna get the total um sales that you have made for
the year and we’re going to take off all the variable costs. Now variable costs are the
costs that you, you spend or need to buy as your sales increase. So for instance, a great
example in Jane’s case would be coffee, the more (16:00) sales Jane makes, the more
coffee she has to buy. So as sales increase, so does the amount of coffee she needs to
buy, so that’s a variable cost as opposed to a fixed cost. In Jane’s case, fixed cost is rent,
variable cost is coffee or food that she has to buy. In Jane’s case also the amount of
wages that she incurs or has to spend increases with the more sales she makes as well.
So wages in Jane’s case would be a fixed cost- oh, a variable cost I should say. So Jane’s
case is a variable cost, if Jane was employing people full time and they’re on a salary,
this is where your wages might be more of a fixed cost. Or you have employed staff, no
matter what dollar value of sales you are making, you’ve got to pay their wages this
week, that would be a fixed cost. So just very, very important to distinguish between
the two and I hope I’ve made that clear, variable cost move with your sales, you spend
more money the more you’re selling.
Fixed costs are rigid, they’re fairly fixed, you’re gonna have those costs whether you
make a dollar in sales or whether you make a $100,000 in sales, they’re gonna be the
same costs. So very important that we isolate those, so working at your gross margin,
we want to take off from a- start with our sales figure and we want to take off all of our
variable costs so as they say.
Purchases, um casual wages or fluctuating wages if you’ve got those as well and in
Jane’s case she had those. That’s gonna give you a gross profit figure, so when you take
your variable cost off your um what they call cost of good shoulder off your purchases,
that is going to give you a gross profit figure.
And with that gross profit figure, I want you to then divide that into your sales and
that’s going to give you a percentage, it’s (18:00) going to give you a percentage figure
or gross margin percentage. And when we’re talking about a gross margin percentage
effectively what it’s saying is that for every $100 I sell or $1 of items I sell after I’ve
paid for my variable cost, this is how many uh dollars or cents are left over. So if you, if
your gross margin percentage is said 30% then in Jane’s case I think it was about 38%
um so for every $100 in sales Jane makes, she’s left with $38 um with which to then pay
her other fixed cost. So that’s what we want is the gross margin percentage, so once
we’ve got those two numbers the total fixed cost for the year and your gross margin
percentage for the same period, we’re going to divide the uh gross margin percentage
into your fixed cost. So get your fixed cost divided by your gross margin percentage and
that is going to give you your rule of thumb break-even figure. And as I said I think in
Jane’s situation it was about $514,000 Jane was left with, oh needs to make as her
break-even figure. That’s the point at which Jane’s covered all her costs and um
including fixed cost and anything she sells after that is gonna then start to make her
Now with those, with that number, this is where the magic begins, once we understand
what this um, this fixed cost amount is we can then work to improve it or see where we
fit. Where our current performance is sitting relative to this number. So of um, if those
numbers have confused you or those formulas have confused you don’t, don’t (20:00)
stress. I’ve got a worksheet here that I’ll put in the show notes for you if you go to
Uh I’ve got uh a bit of a calculation cheat sheet there for you that will help you to work
these numbers out and you can just work through it and, and um go from there. If you
really get stuck just drop me a line to [email protected] and I’ll be
more than happy to help you to work this number out.
But I do want you to work it out and I do want you to know because when you work this
number out you can then work to improve and see how your perform- tracking with it
and then we can work to really make some good results with your uh with your profit,
and the bottom line in your business. And in Jane’s case, we were able to do that
because once we worked out what Jane’s margin was and what her break-even point
was for her business we were able to show her ways that she could actually make more
money but not necessarily get more customers through the door. And ways we did this
um and, and by knowing this number we were able to look at things like her um gross
margin percentage. We were able to actually look at that gross margin percentage
figure and say, “Hey, Jane. How can we improve our buying power there? How can
we get more goods or get our purchases for better pricing?”
We were able to take it advantage of things like um wholesaler incentives for either
buying in um bulk or paying within prescribed credit terms. Um and, and achieve better
buying power. Shopping around to get better buying prices is also another thing that
we were able to look at with her um, looking at volume pricing and things like that. The
other thing we’re able to do is to look at wastage that she was having in her business as
well. So ’cause um, one of the things particularly in the food industry uh (22:00) or any
industry that’s got perishable type items um. Then you know we can look at ways to
improve our uh wastage and make sure that we minimize our wastage and make sure,
those sorts of things all can have a big impact on your break-even point and bringing.
‘Cause both is basically what we want to do is bring the break-even point down as low
as possible. We want that number to be as low as possible because once we reach that
point in our sales, we can then start to make money, make more money once we get
past that point. So we’re always wanting to get out break-even point down as low as
Other things we were able to do with Jane too by fixing up her margins and fixing up
because she didn’t have to have as many customers come through the door. We were
able to reduce her wage bill, she didn’t need to have as many staff hours to generate
um, to generate and service more customers because she was able to make a, a better
profit return per customer that she was already servicing, which was another impact
for Jane by, by working out this number and working with, with the margin’s that
support this number. Uh other areas we’re able to work with her were by improving the
average spend per customer that was coming in. Now, this is an area where you can
get a really um, really good impact and bottom line profit impact on your business. If, if
we can, if we’ve got one customer coming in the door and they’re spending say $20 or
we’re making say on average $25 per transaction that they, they spend with us.
If we can actually add something else of value and offer them something else, this is
what McDonald’s have always done really well over the years with their “Do you want
fries with that?” That if we could actually add some other um incentive sales to, to that
transaction with the customer (24:00) for instance, if I were just buying a coffee, “Hey,
what about a croissant as well?” Or um, you know croissants might have better margins
in them than what the coffee itself has. So if we can upsell a croissant with the coffee as
well per transaction, all of a sudden we can really get some exponential profit leverage
out of that, that transaction with a customer. So really important thing to know and,
and why I really encourage you to work out what your break-even point is and what
your margins are so that you can then look at strategies to improve those.
When- there’s a saying that I love and it’s if you can um measure it um you can
manage it and these, these numbers that I’m talking about with you today are so, so
critical in any business and if you know them, you can manage them and you can work
to improve your bottom line profit. But as I said, if you’re struggling with them uh with
what I’m talking about, feel free to go and grab that free uh cheat sheet, it’s and it will walk you through step by step.
And I’ve got a graph there that just illustrates exactly what I’m talking about and, and
how, you’ll see how, how it resonates and, and uh uh coordinates with your actual, your
actual numbers too as you’re working them out. So now the big thing, if you- to, to work
these numbers out, you need to know your record keeping system needs to be
accurate. Um that is one of the things with any of this stuff if you are working out
numbers like this you need to make sure you’ve got the right systems in place um, right
information, systems in place to provide you with accurate information so that your
um, you’re working on the right, right numbers.
There’s no point um guesstimating it and uh you know it’s wrong, you know you might
be (26:00) saying, “Well, I I only need $300,000 in sales” but you actually need
$500,000 in sales because of your information, um the old garbage in, garbage out
philosophy. You really want to make sure that your record keeping system is um really
accurate to work and you’re using accurate numbers when you work this out.
If you haven’t got, if you, if you don’t fill your bookkeeping or record keeping system is
adequate in calculating those numbers at the very minimum you can use the um, the
financials that your accountant prepared for you. The only caveat on that is that they’ll
probably be out of date because times have usually moved on by the time that you get
those numbers uh from your accountant. This could be a good 12, 18 months and as I
said this is a variable moving target but it will give you- still grab them and use them as
an exercise to work through this and that will help you to get a grasp of where you
roughly are. But I would encourage it strongly if you haven’t got accurate record
keeping, you really need to have it. It’s so easy nowadays with the technology that’s
out there. Um to have this accurate information um and get this information quite
easily if you’re stuck with it please just drop me a line at
[email protected] if you, if you don’t feel your record keeping is
up to scratch and you want a hand with it.
You can drop me a line and I’m more than happy point you in the right direction there
or speak to your accountant as well. They will bethea best place to, to help you as well.
But if you’re not getting anywhere with your accountant or um you feel that, feel that
um you want that bit of extra help by all means just drop me a line at
[email protected] and I will assist you in getting that sorted out
so that you know exactly uh what you need to be doing. What I, what I do encourage uh
people to do is to set their record (28:00) keeping systems up so that you can calculate
this break even number quite easily. Because if you can, it doesn’t become a ha- it
doesn’t have to be a hassle to calculate this number but it’s so- I think you’ll agree that
it’s such a powerful number um to know because we can get down to some really
granular stuff. And um really granular ways to, to help you um grow that bottom line
profit, but yeah you’re really, you want to make, you can set your system up so that it,
that it gives you what your fixed costs are you know and, and totals them for you and it
gives you your variable costs and totals them for you.
So, as I said, drop me a line if you get stuck with that or you want more information on
that and I’m more than happy to help you with that. So there you go, that’s what I
wanted to cover today with you break even point. Um it’s the point at which your sales
or the next dollar in sales is going to um add or start contributing profit to your bottom
line and it as I say- uh hope you can see from the example there with Jane which we
were able to work with Jane and improve that um, that bottom line. It turned out she
didn’t need to make more uh or have more customers coming through the door. She
just needed, we just needed to fine tune the way she was um spending money and, and
fine tune the way she was actually conducting those sales and, and it covers a whole
road- range of things from um your um not only getting your costs up, putting your
prices up sometimes too is another strategy that will help you with uh, with bringing
down your break even point. A lot of people think ,”Oh, I can’t put my prices up because
I’ll lose customers” I can guarantee you that more times than not, you can afford to put
your prices up. If you put your prices up 10% you will not lose uh more than, you won’t
lose 10% of your uh (30:00) business and, and I’ve got some examples that I can show
you that if you want to have a look at those. Um the other thing you know, just while I
think about it too.
The other thing that can affect your break even point and your, your margins quite
considerably is discounting. A lot of um businesses particularly in the online space go,
go to discounting their, their sale, their purch- their sales and what they’re selling. Um
that I’m going to actually do a full episode on the impact of discounting because a lot of
people think, “Oh, if I discount my price by 10% I only have to make an extra 10% in
sales and I’m still no worse off it” actually doesn’t work that way. For the same reasons
that we’ve been talking about today margin but um yeah, we’ll, we’ll cover that in a
separate episode ’cause it’s probably a bit too deep for today.
I’ve probably filled your head with numbers as it is, but remember fixed cost you want
to know your fixed cost and your gross margin just in summary and uh if you get stuck
just drop me a line to [email protected] and I’ll more than happily
help you.
Alrighty, that’s all I had time for today um and I, say it is a critical number that I do want
you to, to look at. I hope that’s been helpful for you, if you haven’t looked at it in the
past or didn’t know about it in the past. I hope that certainly raised some awareness for
you to, to look at that in your business because it does have a profound impact once
you do know it. Um even if you don’t know this, it’s already having a profound impact
uh and it could be worse. So yeah, you just, you really want to know what that number
is to, to get to the bottom of, get to the bottom of that.
Before I go, if you haven’t already joined our free Facebook community um there’s a
great group of people over there, business owners over there all sharing um tips and
tricks and ideas around business and frustrations (32:00) and wins they’re having over
there as well, and offering support and help to each other and business as well. Um so
feel free to jump over there if you haven’t already that at If you go over there and hit that uh link,
um we your- or you can do a search just in Facebook for the business made easy
podcast group and it will come up as well. So there’s two ways you can do it there, but
I’m over there um everyday helping, helping various people with their businesses in
questions and um and supporting the community over there as well.
So feel free to go over there if you haven’t already and um other than that. I hope you
have a fantastic week in business whatever you’re up to, I hope uh you’re doing
something fun out there and you’re really starting to move that needle. We’re getting
right, we’re nearly to halfway through the year, I can’t believe halfway through 2018
but anyway we are, time’s moving fast, so we need to move fast too.
Until next week thanks so much for joining me. I really do appreciate you tuning in and I
hope you have found that episode helpful. It is always hard with the technical episode
when you’re talking about numbers like that but go and grab that cheat sheet at and um and that will help you and if you get
stuck, then be sure I’ll see you out.
Alrighty, I’m gonna hand you over to Mia now and until next week. Here’s to your
success. Take us out, Mia.
Mia: You’ve been listening to the Business Made Easy podcast. Where we make
business easy.





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