Intro into profit and loss

In this animation, we’ll be looking at profit and loss and the break even point.

I’m sure you’re all aware, profit is what you are left with when you take away all of your costs. Loss is when all of your costs are more than your income and you haven’t made money.

Break even is the number of units you need to sell before you start making a profit, so why do we work that out and how?

First, this is a simple calculation you can do to help you work out a selling price. Too cheap and you won’t make money, too expensive and people won’t buy it or will go to a competitor.

The break even point will tell us how long it will take, how much money you need to earn, and how many units you need to sell for the business to cover costs and be profitable.

So how do we work out this break even point?

This is worked out by: ‘fixed costs’ / (unit sales price – unit variable price).

Say you’re opening a T-shirt shop. Your fixed costs are the elements you had to pay that are fixed, so a website, app, logo, equipment. Let’s just say £3,000.

Unit sale price = your T-shirts sell for £15.
Unit variable price = this is your time, delivery, materials, stickers, etc… this is just £5 for example.
So the 15–5 is called your contribution margin, which equals a simple £10!

So your break even point is 3000 / (15–5) = 300.
You will make profit after selling 300 T-shirts!
So to find your break even in money, that’s simply 300 x (unit sales price (15)) = £4500. Once you have taken in £4500, anything after that is profit!

To work out time, you can use sales forecasting. How many T-shirts will you sell a day? 10?

You can either do: 300 T-shirts is your break even and you sell 10 a day = 300/10 = 30.

Or: if you sell 10 T-shirts at £15 a day = (£150 (10x£15) a day), it will take (4500 / 150) = 30 days to make a profit at that rate.

Is that sustainable? Let’s chat about it in the next lesson and how you can find other ways to make money.