Break-Even Analysis
Last updated 8th May 2020
It is more important than ever that a business understands their break-even position to make informed decisions and plan for the future.
Break-Even Point
A business’s break-even point is the stage at which total revenue equals total costs. Once a business has determined their break-even point, they may begin to assess pricing structure, costs and whether the business is sustainable at this break-even point.
How to calculate break-even point?
There are numerous ways for determining a break-even point.
- Calculating break-even point based on sales when selling a product
- Break-Even Point = Fixed Costs / Gross Profit MarginExample 1
If fixed costs = $100,000 per month and Gross Profit Margin = 70% then your Break-even point = $142,857. That is, you must sell at a minimum of $142,857 per month to ensure that you don’t lose any money.
- Calculating break-even point based on units
- Break-Even Point = Fixed Costs / (Revenue Per Unit – Variable Cost Per Unit)Example 2
If variable cost per unit = $20 and sales price per unit = $25 then your contribution margin = $5 per unit. So, if your overall fixed cost for the business is $50,000 per month, then you must sell a minimum of 10,000 units per month to ensure that you don’t lose any money.
- Calculating break-even point based on sales when selling a service
- Break-Even Point = Fixed CostsExample 3
If fixed costs = $100,000 per month then your Break-even point = $100,000. That is, you must sell at a minimum of $100,000 per month to ensure that you don’t lose any money.
Break-Even Analysis
Using their break-even point, businesses need to evaluate their current situation as a result of Covid-19 and how to best arrive at the break-even point – by reducing fixed costs, selling more units, increasing prices or a combination of these options.
The break-even point is a financial formula that should act as part of a wider business plan. It is critical that during this current economic climate businesses use tools to assess costs, sales volume and pricing structures to plan for the future based on numerous scenarios.
Conclusion
There are many tools available to businesses that can be used to make informed decisions – break-even analysis is one of these tools. It is more important than ever to stay educated and utilize what is available to you.
