Breakeven = Fixed Cost divided by Gross Profit Margin.
For example, if you fixed costs, costs you have to pay every month even if you sold nothing, (rent, utilities, phone, insurance, and everyone in the office, payments you committed to, marketing, etc) were $55,000 a month, and when you sold something your Gross Profit Margin was 40% (revenue – direct expenses BECAUSE you made that sale – direct labor, materials, sales commission, etc.) then your Breakeven would be $55,000 / .4 = $137,400.
You would have to do $137,400 in business to break even – you make nothing.
So to lower your breakeven and be able to make money more easily, then you would need to lower your fixed cost or increase your gross profit margin by either raising your prices and/or lowering your direct costs.
So, using the above example, what if we lowered our fixed cost from $55,000 to $48,000? $48,000/.4 = $120,000. We lowered our indirect costs by $7,000 and start making money with $17,400 LESS in sales each month.
What if we now increased our Gross Margin by 3% to 43%? $48,000 / .43 = $111,627. Now we start making money each month with $25,773 less in sales.
It’s easy to see that this goes the other way. Hire one or two more employees, and finance a truck, and add a few more expenses, and pay too much for direct expenses and your profit vanishes.
As the leader, you are responsible to figure this out. Nobody else can or will do it – not even your accountant.
You got this?