How many products will you need to sell in order to cover your cost, and at what level of sales will your business make a profit?

To answer this you will need to calculate and find what is the breakeven point of your business.

Breakeven point (or breakeven analysis) is the point in which expenses are covered, and anything that is sold above that point means that your business is making a profit.

Calculating the breakeven point is done by defining the relationship between expenses and revenues and understanding how expenses/cost will change as sales increase or decrease.

Let's look at how you calculate a breakeven point.

First, let's look and what you'll need for the calculation:

Cost: There are two types of cost/expenses:

1. Variable cost - This cost is a direct cost for producing your product (cost of materials, labor, packaging, etc.). This will increase or decrease as sales increase or decrease. To calculate your variable cost per item, use this cost sheet for each of your items.

2. Fixed cost – This cost is fixed and will not change as sales increase or decrease. This cost will include items like rent/utilities, payroll expenses, monthly website hosting, etc. These are expenses that your business will have regardless of the sales volume. To help calculate your fixed cost, use these budget sheets.

Revenue / Sales -This refers to the selling price. Wholesale price if you sell wholesale and retail price if you sell directly to customers. 

Contribution Margin – This is the margin between your variable cost and your selling price. The formula to calculate that looks like this:

CONTRIBUTION MARGIN = SELLING PRICE PER UNIT - VARIABLE COST PER UNIT

For example, let's assume that the selling price per unit is $24, and the variable cost per unit is $10. Based on that, the contribution margin will be $24-$10=$14.

That means that every time a product is sold, it will have $14 of profit that can go now towards covering the fixed cost/expenses of the business. 

So, if the fixed cost/expenses are $1400 per month and the Contribution Margin is $14 per unit, you will need to sell 100 units (100 x $14 = $1400) to cover the fixed cost and break even each month.

Which means, that to make a profit you will need to sell more the 100 units a month.

Note: If you offer a variety of products with different levels of cost and profit margins, to calculate your breakeven point, use an average cost of all your products and an average selling price of all your products.

Ready to calculate your fashion business breakeven point?

• Calculate your Fixed cost per month using these budget sheets.

• Calculate your Variable cost per item using this cost sheet form.

• Decide (if you haven’t yet) on your selling price and calculate your Contribution Margin.

• Based on the above and using the below formula, calculate how many units per month you will need to sell to breakeven:

FIXED COST ÷ CONTRIBUTION MARGIN = BREAKEVEN POINT (BY UNITS)

Understanding your breakeven point will help you get a better perspective on your sales goals and set achievable sales goals for your fashion business.

Keep in mind that you will need to revisit your breakeven point as your business grows and adjust the numbers accordingly.

** Need help calculating your breakeven point? Our budget sheets include an easy formula for you to use. Click to buy here. 

Good luck.