After years of confusion, Bill Medina of Medina Construction finally found a simple formula to calculate his company's break even point -- the point when gross margin equals overhead.
For instance if your total overhead for the year is $500,000, and your gross profit percentage is 30%, you need to sell $1.66 million to break even.
"Try to get to the break even point as quick as you can — everything after that is profit," Medina says. However, he cautions, there is a cost associated with each additional dollar of sales over the break even point. "Your sales rise, but so would your overhead, insurance, and workers' compensation," he says. Also, if you change your gross margin percentage, the break even number can drastically change.
Medina has used this figure as part of a financial analysis to formulate a strategy for his business. "In our community of 50,000 there is a small construction pie. We need to do more commercial work early on in the year," Medina says. "We're changing our strategy on what work we're pursuing and when."