By Mylena Vazquez

The concept of breaking even is pretty intuitive. If you buy a t-shirt for $5, you need to resell it for at least $5 to make your money back. Easy, right?

Well, not so much. In business, there are rarely any transactions that simple. For starters, your business probably has fixed costs, like rent, salaries, web hosting, advertisements, etc. Fixed costs are expenses that remain the same no matter how much or how little volume you sell.

But that’s not all! To figure out how to break even, you also have to keep in mind your contribution margin, which is calculated by subtracting your variable costs from your selling price. Variable costs are costs that do change based on how many units you sell. This includes not only the cost of acquiring or making your product, but also things like commissions for employees, which are by definition dependent on how many units they sell.

And there’s still more. Businesses do not usually operate in isolation; they usually partner with other companies to form a distribution chain. For example, if your company is a small clothing boutique, you would likely buy the above-mentioned t-shirts from a wholesaler, who would buy it directly from the manufacturer. Each of these companies in the distribution chain also have to break even, at the very least.

Overwhelmed? Don’t be! For starters, the formula for calculating your breakeven point is incredibly simple: just divide your fixed costs by your contribution margin. And here’s another simple trick: when your total revenues equal your total costs, that’s when you’re breaking even. The chart below should help; note that the breakeven point occurs when the cost line and the revenue line intersect:

As a small business owner, it is of the utmost importance that you really understand the nuances of the breakeven calculations. Don’t get me wrong, though—I know that you don’t want to break even, you want to profit. But think about it—how do you know if you’re profiting if you don’t know if you’re truly breaking even?