"What is break-even? (and how to work it out for your store)"

Break-even sounds like an accountant's word, but you already think about it. Every time you wonder, how many orders do I need this month just to be okay, you are asking a break-even question. Let us put a number on it.

Two kinds of costs

To find the point where you stop losing, separate your costs into two groups.

• Fixed costs. These do not change with the number of orders. Examples are your store subscription, a tool or two, rent for a small workspace, a monthly phone and internet bill, and any salary you pay regardless of sales.
• Variable costs. These rise with every order. Examples are the cost of making or buying the product, the packaging, shipping you pay and payment charges.

For each order, what is left after variable costs is called contribution. It is the amount each sale contributes toward paying the fixed costs, and then toward profit. What is contribution margin goes into it further.

The arithmetic, with illustrative numbers

Say your fixed costs come to Rs 6,000 per month. This is an example, so please use your own figures.

Say each order, after all variable costs, leaves Rs 200 of contribution. Again, this is only for illustration.

Break-even units = fixed costs divided by contribution per unit.

6,000 divided by 200 equals 30.

So you need 30 orders in a month to cover Rs 6,000 of fixed costs. At 29 orders you are slightly behind. At 30 you are even. At 31 you earn your first rupees of true profit, Rs 200 for that order, and each order after adds another Rs 200.

You can check it the other way. 30 orders x Rs 200 = Rs 6,000. The costs and the contribution match, so the profit is zero. That is the definition.

Reading the result

The number 30 is not a target to be proud of. It is a floor. Below it, the month costs you money. Above it, you earn. Looking at it in this way helps with several decisions.

• Is 30 orders a month realistic for your traffic? If you have been getting 10, you either need more orders or lower fixed costs, or higher contribution per order.
• Would a Rs 500 monthly tool be worth it? The extra Rs 500 adds 2.5 more orders to your break-even (500 divided by 200). That is a useful way to judge a subscription.
• What if you raise the price by Rs 40 and orders do not change? Contribution rises to Rs 240, and break-even becomes 25 orders (6,000 divided by 240).

Do not forget the hidden costs

The result is only as honest as your inputs. Many sellers leave out things that belong in variable costs.

• Returns and failed COD deliveries. Cost of a returned order, step by step.
• Payment charges and COD fees.
• Free gifts, samples and discounts.
• Ad spend per order, if you run ads. Break-even orders including ad spend extends the method.

Also include your own time if you want to know whether the business can really pay you. Profit per hour of your own time shows how.

How to use it each month

Write your fixed costs on a sheet. Write your average contribution per order. Divide. Watch your order count against that number through the month. Once you cross it, the rest of the month is profit that you can plan around.

For a longer worked version, break-even units for monthly fixed costs takes the same idea further. The main lesson is small and useful. Know your number, and you stop guessing whether a slow week is a crisis or just a Tuesday.