Thebreak-even pointis the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business. In other words, you've reached the level of production at which the costs of production equals the revenues for a product.
For any new business, this isan important calculation in your business plan. Potential investors in a business not only want to know the return to expect on their investments, but also the point when they will realize this return. This is because some companies may take years before turning a profit, often losing money in the first few months or years before breaking even. For this reason, break-even point is an important part of any business plan presented to a potential investor.
For existing businesses, this can be a useful tool not only in analyzing costs and evaluating profits they’ll earn at different sales volumes, but also to prove their potential turnaround after disaster scenarios.
Benefits of a break-even analysis
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Price smarter
Finding your break-even point will help you price your products smarter. A lot of psychology goes into pricing, but knowing how it will affect your profitability is just as important. Especially, when making sure that you can pay all your bills.
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Catch missing expenses
It’s easy to overlook expenses when you’re thinking through a new business idea. When you complete the break-even analysis you have all of your financial commitments figured out, limiting surprises in the future.
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Set revenue targets
After completing the analysis, you will know exactly how much you need to sell in order to be profitable. This sets sales goals for your business. When you have a number in mind, it will be easier to follow through.
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Make smarter decisions
Helps limit business decisions made on emotions. How you feel is important, but it shouldn't be the base of your business decisions. The break-even analysis will help you start your business based on facts.
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Limit financial strain
Mitigates risk by showing when to avoid a business idea. It helps potential businesses avoid failure as well as limit the financial toll of a bad idea through realistic analysis of potential outcomes.
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Fund your business
The break-even analysis is usually a requirement in order to take on investors or debt to fund your business. It proves that your plan is viable, which will also help you feel better about taking on financing.
Getting started
Create your break-even analysis with this calculator and determine your business’s break-even point in units using the following formula:
Fixed Costs ÷ (Price - Variable Costs) = Break-Even Point in Units
What you need to get started:
This analysis will help you easily prepare an estimate and visual to include in your business plan. We’ll do the math and all you will need is an idea of the following information.
- Your business's estimatedfixed costs
- Your business's sellingprice per unit
- Your business's projectedunit sales
- Your business's estimatedvariable cost per unit
Tips and tricks
This break-even analysis is based on the foundation of a single product or service.
To calculate the break-even point in units we use the formula:
Break-even point (units) = fixed costs ÷ (sales price per unit – variable cost per unit)
Or in sales dollars using the formula:
Break-even point (sales dollars) = fixed costs ÷ contribution margin
Contribution Margin is the difference between the price of a product and what it costs to make that product.
The calculation is as follows:
Contribution margin = (sale price per unit – variable cost per unit) ÷ sale price per unit
The total fixed costs, variable costs, unit or service sales are calculated on a monthly basis in this calculator. Meaning that adding the total for all products and services monthly should account for all products and services. You may also want to do the calculation individually for each product or service if the products or service sales vary per month.
Remember the break-even point is used as an estimate for lender viability and your business plan. It is not intended to 100% accurately determine your accounting or financing since those calculations can only be done after all costs and production have occurred. It's also a good idea to throw a little extra, say 10%, into your break-even analysis to cover miscellaneous expenses that you can't predict.
Fixed costs are costs incurred during a specific period of time that do not change with the increase or decrease in production or services. Once established, fixed costs do not change over the life of an agreement or cost schedule. For this calculator, we are calculating the fixed costs on a monthly basis.
If you have fixed costs that do not incur monthly you should still include them, but calculate the monthly amount that goes towards that expense. For example, if something is paid for on a quarterly basis, but does not change with production you would divide that cost by four in order to estimate the monthly amount of that cost. In the break-even analysis, we will help you break down the potential fixed costs related to your business.
Examples of fixed costs include:
- Rental lease payments
- Salaries
- Property taxes
- Insurance
- Interest
- Depreciation
Sometimes determining whether a cost is fixed or variable is more complicated.
There is also a category of costs that falls in between, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.
The best way to include these costs is to separate out the part that is variable from the part that is fixed. These may include minimum payments or fees for services and products. For the break-even analysis to be as accurate as possible it is important to separate any semi-variable costs into their fixed and variable parts if possible.
Examples of semi-variable costs include:
- Monthly telephone services
- Repairs
- Indirect materials
- Indirect labor
- Fuel
- Power
