Financial terms: Break even point

Do you know how much revenue is needed for you to start being profitable?

While we've previously discussed assets and liabilities in our ongoing series of financial terms for those in the fashion sector, the break-even point is the moment when total costs (expenses) and total revenue are equal ➡️ you're no longer operating at a loss and about to start operating at a profit.

It's not uncommon for businesses to be in debt when they start because they have to fund the initial costs, such as hiring employees, renting a space, and buying equipment, or production costs, such as creating the first collection, buying fabric, etc.

Generally, companies' break-even points should come between 6 months and 18 months. Here's a step-by-step guide to help you calculate it:

→ Identify your fixed costs (FC). These are the expenses that you have to pay no matter what, even if your shop is closed. Examples include rent, utilities, and salaries.

→ Figure out your gross margin on sales (%GM). This is the percentage of each sale that is left over after you’ve paid the direct costs of producing your goods. To calculate it, subtract the cost of goods sold (COGS) from your sales revenue and then divide by your sales revenue. Multiply by 100 to get the percentage.

→ Use the next simple formula to calculate your break-even point:

Rev * %GM = FC

Revenue (Rev) times your gross margin percentage (%GM) should equal your fixed costs (FC).

Graphically understood as:

A common mistake is to think that your revenue just needs to equal your fixed costs (Rev = FC). But remember, only a portion of your revenue (your gross margin) actually goes towards covering those fixed costs.

Keep an eye out for our next blog, which will discuss all the different expenses that someone in the fashion sector might incur.

Which month did your company reach the break-even point?