break even point for business plan

What is Break-Even Analysis?

What is the break-even analysis formula, break-even analysis example, graphically representing the break-even point, free cost-volume-profit analysis template, download the free template, interpretation of break-even analysis, sensitivity analysis.

• Factors that Increase a Company’s Break-Even Point

How to reduce the break-even point

Additional resources, break even analysis.

The point in which total cost and total revenue are equal

Break-even analysis in economics, business, and cost accounting refers to the point at which total costs and total revenue are equal. A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs ( fixed and variable costs ).

Key Highlights

• Break-even analysis refers to the point at which total costs and total revenue are equal.
• A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs.
• Break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

The formula for break-even analysis is as follows:

Break-Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit)

• Fixed Costs are costs that do not change with varying output (e.g., salary, rent, building machinery)
• Sales Price per Unit is the selling price per unit
• Variable Cost per Unit is the variable cost incurred to create a unit

It is also helpful to note that the sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs.

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break-even point of Company A’s premium water bottle:

Break Even Quantity = $100,000 / ($12 – $2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles to break even.

For more information about variable costs, check out the following video:

The graphical representation of unit sales and dollar sales needed to break even is referred to as the break-even chart or cost-volume-profit (CVP) graph. Below is the CVP graph of the example above:

Explanation:

• The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-axis (vertical).
• The red line represents the total fixed costs of $100,000.
• The blue line represents revenue per unit sold. For example, selling 10,000 units would generate 10,000 x $12 = $120,000 in revenue.
• The yellow line represents total costs (fixed and variable costs). For example, if the company sells 0 units, then the company would incur $0 in variable costs but $100,000 in fixed costs for total costs of $100,000. If the company sells 10,000 units, the company would incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed costs for total costs of $120,000.
• The break even point is at 10,000 units. At this point, revenue would be 10,000 x $12 = $120,000 and costs would be 10,000 x 2 = $20,000 in variable costs and $100,000 in fixed costs.
• When the number of units exceeds 10,000, the company would be making a profit on the units sold. Note that the blue revenue line is greater than the yellow total costs line after 10,000 units are produced. Likewise, if the number of units is below 10,000, the company would be incurring a loss. From 0-9,999 units, the total costs line is above the revenue line.

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As illustrated in the graph above, the point at which total fixed and variable costs are equal to total revenues is known as the break-even point. At the break-even point, a business does not make a profit or loss. Therefore, the break-even point is often referred to as the “no-profit” or “no-loss point.”

The break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

Therefore, the concept of break-even point is as follows:

• Profit when Revenue > Total Variable Cost + Total Fixed Cost
• Break-even point when Revenue = Total Variable Cost + Total Fixed Cost
• Loss when Revenue < Total Variable Cost + Total Fixed Cost

Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling . Using Goal Seek in Excel, an analyst can backsolve how many units need to be sold, at what price, and at what cost to break even.

Factors that Increase a Company’s Break-Even Point

It is important to calculate a company’s break-even point in order to know the minimum target to cover production expenses. However, there are times when the break-even point increases or decreases, depending on certain of the following factors:

1. Increase in customer sales

When there is an increase in customer sales, it means that there is higher demand. A company then needs to produce more of its products to meet this new demand which, in turn, raises the break-even point in order to cover the extra expenses.

2. Increase in production costs

The hard part of running a business is when customer sales or product demand remains the same while the price of variable costs increases, such as the price of raw materials. When that happens, the break-even point also goes up because of the additional expense. Aside from production costs, other costs that may increase include rent for a warehouse, increases in salaries for employees, or higher utility rates.

3. Equipment repair

In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even.

In order for a business to generate higher profits, the break-even point must be lowered. Here are common ways of reducing it:

1. Raise product prices

This is something that not all business owners want to do without hesitation, fearful that it may make them lose some customers.

2. Outsourcing

Profitability may be increased when a business opts for  outsourcing , which can help reduce manufacturing costs when production volume increases.

Every company is in business to make some type of profit. However, understanding the break-even number of units is critical because it enables a company to determine the number of units it needs to sell to cover all of the expenses it’s accrued during the process of creating and selling goods or services.

Once the break-even number of units is determined, the company then knows what sales target  it needs to set in order to generate profit and reach the company’s financial goals.

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• HR & Payroll

Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

• Understand what break-even point is
• Know why it is important
• Learn how to calculate break-even point
• Know how to do break-even analysis
• Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a  break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

• how profitable is your present product line
• how far sales drop before you start to make a loss
• how many units you need to sell before you make a profit
• how decreasing or increasing price and volume of product will affect profits
• how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

• Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
• Contribution margin:   Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
• Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
• Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea.  This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

• The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
• It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
• It assumes average variable costs are constant per unit of output, per the range of the number of sales
• It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
• In multi-product companies,  the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

• You can identify how much, or how many, you have to sell  to be profitable.
• Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

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How to Calculate Your Break-Even Point

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At its simplest, a break-even point (or BEP) is the point at which your business’s expenses equal its revenue. In other words, if you’re breaking even, you aren’t spending more than you’re making—which also means you aren’t making more than you’re spending. At your break-even point, your business isn’t profitable, but it also isn’t losing money: it’s at an exact net neutral.

Like a lot of supposedly simple accounting principles , the break-even point is a little harder to understand than it initially appears. Let’s dive into how to calculate your break-even point and how it can guide your business.

How do you calculate your break-even point?

The basic break-even point calculation is pretty simple (we've got an example that spells it out further down):

Break-even point = Total fixed costs / (price per unit – variable costs per unit)

Of course, before you can calculate your break-even point, you need to figure out your total fixed costs, variable costs per unit, and price per unit:

• Total fixed costs are expenses that stay the same regardless of how many products you sell. Costs like rent, salaries, and fixed interest rate payments all count as fixed costs.
• Variable costs per unit are expenses that vary with product creation. For instance, your sales commissions, shipping costs, and costs of raw materials vary month to month depending on how many products you sell.
• Price per unit means how much you sell each product for. You’re the one who sets this cost, and a break-even point can show if you’re selling your product for too little or too much (more on that below).

The answer to the equation will tell you how many units (meaning individual products) you need to sell to match your expenses.

Note that the total fixed costs aren’t per product but rather the sum total of your business expenses over any given time period, whether that’s a month, quarter, or year (you choose!). In contrast, variable costs are per unit.

While gathering the information you need to calculate your break-even point is tricky and time consuming, you don’t have to crunch the numbers with just a pen and paper. Any number of free online break-even point calculators can help, like this calculator by the National Association for the Self-Employed.

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What is an example of a break-even point calculation?

Let’s say Maria owns a small business that primarily sells handmade quilts. Between rent, property insurance, and other crucial expenses, Maria’s fixed costs total $2,000 a month. She sells each quilt for $500 each and determines that variable expenses for each product come to about $250. For her, the break-even point formula would look like this:

$2,000 / ($500 – $250) = 8 products/month

So to break even, Maria needs to create and sell eight quilts a month. If she wants to turn a profit, she'll need to sell at least nine quilts a month.

What does your break-even point tell you?

Your break-even point can help you answer the following questions:

• How many products do you need to produce and sell before you start turning a profit?
• Are you selling your products at too low a price per unit to make a profit?
• Do you need to lower any fixed costs (e.g., your own salary, your advertising budget, or your electric bill) to break even?
• Is your business model sustainable? In other words, is it even possible for you to break even given your anticipated fixed expenses, costs of labor, sales, and costs of production?

In our example above, Maria’s break-even point tells her she needs to create eight quilts a month, right? But what if she knows she can create only six a month given her current time and resources? Well, per the equation, she might need to up her cost per unit to offset the decreased production. Or she could find a way to lower her total fixed costs—say, by scouting around for a better property insurance rate or fabric supplier.

The takeaway

Once you calculate your break-even point, you can determine how many products you need to manufacture and sell to make your business profitable.

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Master the Break Even Analysis: The Ultimate Guide

A break-even point tells you exactly how much product you need to sell to become profitable. Learn how to calculate your break-even points, with examples and a free downloadable template in this guide.

If you’re a business owner, or thinking about becoming one, you should know how to do a break-even analysis. It’s a crucial activity for making important business decisions and financial planning .

A break-even analysis will tell you exactly what you need to do in order to make back your initial investment and begin turning a profit.

Table of contents

What is break-even analysis?

Benefits of a break-even analysis, how to calculate break-even point, break-even analysis examples: when to use it, break-even analysis limitations, tips to lower your break-even point, download your free break-even analysis template, break-even analysis faq.

Break-even analysis is a small-business accounting process for determining at what point a company, or a new product or service, will be profitable. It’s a financial calculation used to determine the number of products or services you must sell to at least cover your production costs.

The break-even theory is based on the fact that there is a minimum product level at which a venture neither makes profit nor loss. M.B. Ndaliman, An Economic Model for Break-even Analysis

For example, a break-even analysis could help you determine how many cellphone cases you need to sell to cover your warehousing costs, or how many hours of service you’ll have to bill to pay for your office space. Anything you sell beyond your break-even point will add profit.

To fully understand break-even analysis for your business, you should be aware of your fixed and variable costs.

• Fixed costs: expenses that stay the same no matter how much you sell.
• Variable costs: expenses that fluctuate up and down with production or sales volume.

Learn more: Small Business Accounting 101: How To Set Up and Manage Your Books

Many small and medium-sized businesses never perform any meaningful financial analysis. They don’t know how many units they have to sell to see a return on their capital.

Break-even analysis is a way to find out the minimum sales volume so that a business does not suffer losses. Lis Sintha, Importance of Break-Even

A break-even point analysis is a powerful tool for planning and decision making, and for highlighting critical information like costs, quantities sold, prices, and so much more.

Price smarter

Finding your break-even point will help you understand how to price your products better. A lot of psychology goes into effective pricing, but knowing how it will affect your gross profit margins is just as important. You need to make sure you can pay your bills.

Cover fixed costs

When most people think about pricing, they think about variable cost—that is, how much their product costs to make. But in addition to variable costs, you also need to cover your fixed costs, like insurance or web development fees. Performing a break-even analysis helps you do that.

Catch missing expenses

It’s easy to forget about expenses when you’re thinking through a small business idea. When you do a break-even analysis you have to lay out all your financial commitments to figure out your break-even point. This will limit the number of surprises down the road.

Set sales revenue targets

After completing a break-even analysis, you know exactly how many sales you need to make to be profitable. This will help you set more concrete sales goals for you and your team. When you have a clear number in mind, it will be much easier to follow through.

Make smarter decisions

Entrepreneurs often make business decisions based on emotion. If they feel good about a new venture, they go for it. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to make decisions when you’ve put in the work and have useful data in front of you.

Limit financial strain

Doing a break-even analysis helps mitigate risk by showing you when to avoid a business idea. It will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes.

Fund your business

A break-even analysis is a key component of any business plan . It’s usually a requirement if you want to take on investors or borrow money to fund your business. You have to prove your plan is viable. More than that, if the analysis looks good, you will be more comfortable taking on the burden of financing.

Your break-even point is equal to your fixed costs, divided by your average selling price, minus variable costs. It is the point at which revenue is equal to costs and anything beyond that makes the business profitable.

Formula: break-even point = fixed cost / (average selling price - variable costs)

Before we calculate the break-even point, let’s discuss how the break-even analysis formula works. Understanding the framework of the following formula will help determine profitability and future earnings potential.

Basically, you need to figure out what your net profit per unit sold is and divide your fixed costs by that number. This will tell you how many units you need to sell before you start earning a profit.

As you now know, your product sales need to pay for more than just the costs of producing them. The remaining profit is known as the contribution margin ratio because it contributes sales dollars to the fixed costs.

Now that you know what it is, how it works, and why it matters, let's break down how to calculate your break-even point.

Before we get started, download your free copy of the break-even analysis template . You can make a copy, edit the template, and do your own calculations.

Step 1: Gather your data

The first step is to list all the costs of doing business—everything including the cost of your product, rent, and bank fees. Think through everything you have to pay for and write it down.

The next step is to divide your costs into fixed costs and variable costs.

Fixed costs

Fixed costs are any costs that stay the same, regardless of how much product you sell. This could include things like rent, software subscriptions, insurance, and labor.

Make a list of everything you have to pay for, no matter what. In most cases, you can list total expenses as monthly amounts, unless you’re considering an event with a shorter timeframe, such as a three-day festival. Add everything up. If you’re using the break-even analysis spreadsheet, it will do the math for you automatically.

Variable costs

Variable costs are costs that fluctuate based on the amount of product you sell. This could include things like materials, commissions, payment processing, and labor.

Some costs can go in either category, depending on your business. If you have salaried staff, they will go under fixed costs. But if you pay part-time hourly employees who only work when it's busy, they will be considered variable costs.

Make a list of all your costs that fluctuate depending on how much you sell. List the price per unit sold and add up all the costs.

Average price

Finally, decide on a price. Don’t worry if you’re not ready to commit to a final price yet. You can change this later. Keep in mind, this is the average price. If you offer some customers bulk discounts, it will lower the average price.

Step 2: Plug in your data

Now it’s time to plug in your data. The spreadsheet will pull your fixed cost total and variable cost total up into the break-even calculation. All you need to do is to fill in your average price in the appropriate cell. After that, the math will happen automatically. The number that gets calculated in the top right cell under Break-Even Units is the number of units you need to sell to break even.

In the break-even analysis example above, the break-even point is 92.5 units.

Step 3: Make adjustments

Feel free to experiment with different numbers. See what happens if you lower your fixed or variable costs or try changing the price. You may not get it right the first time, so make adjustments as you go.

Warning: Don’t forget any expenses

The most common pitfall of break-even-point analysis is forgetting things—especially variable costs. Break-even analyses are an important step toward making important business decisions. That’s why you need to make sure your data is as accurate as possible.

To make sure you don’t miss any costs, think through your entire operations from start to finish. If you think through your ecommerce packaging experience, you might remember that you need to order branded tissue paper, and that one order lasts you 200 shipments.

If you’re thinking through your event setup, you might remember that you’ll need to provide napkins along with the food you’re selling. These are variable costs that need to be included.

If you need further help, use a break-even calculator to help you determine your financial analysis.

There are four common scenarios for when it helps to do a break-even analysis.

1. Starting a new business

If you’re thinking about starting a new business , a break-even analysis is a must. Not only will it help you decide if your business idea is viable, it will force you to do research and be realistic about costs, and make you think through your pricing strategy.

2. Creating a new product

If you already have a business, you should still do a break-even analysis before committing to a new product —especially if that product is going to add significant expense. Even if your fixed costs, like an office lease, stay the same, you’ll need to work out the variable costs related to your new product and set prices before you start selling.

3. Adding a new sales channel

Any time you add a new sales channel, your costs will change—even if your prices don’t. For example, if you’ve been selling online and you’re thinking about doing a pop-up shop , you’ll want to make sure you at least break even. Otherwise, the financial strain could put the rest of your business at risk.

This applies equally to adding new online sales channels , like shoppable posts on Instagram . Will you be planning any additional costs to promote the channel, like Instagram ads? Those costs need to be part of your break-even analysis.

4. Changing your business model

If you’re thinking about changing your business model, for example, switching from dropshipping products to carrying inventory, you should do a break-even analysis. Your startup costs could change significantly, and this will help you figure out if your prices need to change too.

Learn more: 7 Ways Small Businesses Can Save Money In Their First Year

Break-even analysis plays an important role in bookkeeping and making business decisions, but it’s limited in the type of information it can provide.

Not a predictor of demand

It’s important to note that a break-even analysis is not a predictor of demand. It won’t tell you what your sales are going to be, or how many people will want what you’re selling. It will only tell you the amount of sales you need to make to operate profitably.

Dependent on reliable data

Sometimes costs fall into both fixed and variable categories. This can make calculations complicated and you’ll likely need to wedge them into one or the other. For example, you may have a baseline labor cost no matter what, as well as an additional labor cost that could fluctuate based on how much product you sell.

The accuracy of your break-even point depends on accurate data. If you don’t feed good data into a break-even formula, you won’t get a reliable result.

Many businesses have multiple products with multiple prices. Unfortunately, the break-even point formula doesn’t reflect this kind of nuance. You’ll likely need to work with one product at a time, or estimate an average price based on all the products you might sell. If this is the case, it’s best to run a few different scenarios to be better prepared.

As prices fluctuate, so do costs. This model assumes that only one thing changes at a time. Instead, if you lower your price and sell more, your variable costs might decrease because you have more buying power or are able to work more efficiently. Ultimately, it’s only an estimate.

Ignores time

The break-even analysis ignores fluctuations over time. Your timeframe will be dependent on the period you use to calculate fixed costs (monthly is most common). Although you’ll see how many units you need to sell over the course of the month, you won’t see how things change if your sales fluctuate week to week, or seasonally over the course of a year. For this, you’ll need to rely on good cash flow management and possibly a solid sales forecast .

In addition, break-even analysis doesn’t take the future into account. If your raw material costs double next year, your break-even point will be a lot higher, unless you raise your prices. If you raise your prices, you could lose customers. This delicate balance is always in flux.

Ignores competitors

As a new entrant to the market, you’re going to affect competitors and vice versa. They could change their prices, which could affect demand for your product, causing you to change your prices too. If they grow quickly and a raw material you both use becomes more scarce, the cost could go up.

Ultimately, a break-even analysis will give you a very solid understanding of the baseline conditions for being successful. It is a must. But it’s not the only research you need to do before starting or making changes to a business.

What if you complete your break-even analysis and find out that the number of units you need to sell seems unrealistic or unattainable? Don’t panic: you may be able to make some adjustments to lower your break-even point.

1. Lower fixed costs

See if there’s an opportunity to lower your fixed costs. The lower you can get them, the fewer units you’ll need to sell in order to break even. For example, if you’re thinking about opening a retail store and numbers aren’t working out, consider selling online instead. How does that affect your fixed costs?

2. Raise your prices

If you raise your prices, you won’t need to sell as many units to break even. The marginal contribution per unit sold will be higher. When thinking about raising your prices, be mindful of what the market is willing to pay and of the expectations that come with a price. You won’t need to sell as many units, but you’ll still need to sell enough—and if you charge more, buyers may expect a better product or better customer service.

3. Lower variable costs

Lowering your variable costs is often the most difficult option, especially if you’re just going into business. But the more you scale, the easier it will be to reduce variable costs. It’s worth trying to lower your costs by negotiating with your suppliers, changing suppliers, or changing your process. For example, maybe you’ll find that packing peanuts are cheaper than bubble wrap for shipping fragile products .

If you haven't already, remember to download your free break-even analysis template .

Doing a break-even analysis is essential for making smart business decisions. The next time you’re thinking about starting a new business, or making changes to your existing business, do a break-even analysis so you’ll be better prepared.

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What is a break-even point (BEP)?

What are the three methods to calculate your break-even point.

• Fixed costs: Expenses your business has to pay regardless of how many units you make or sell.
• Variable costs: Expenses that increase or decrease depending on your level of production or sales volume.
• Average sales price: The amount you will charge customers per unit of your product, averaged to include any bulk discounts you may offer.

What’s a good margin of safety?

What’s the difference between break-even analysis and break-even point.

Break-even point refers to a measure of the margin of safety. A break-even analysis tells you how many sales you must make to cover the total costs of production.

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Break-Even Analysis: What It Is and How to Calculate

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A break-even analysis helps business owners find the point at which their total costs and total revenue are equal, also known as the break-even point in accounting . This lets them know how much product they need to sell to cover the cost of doing business.

At the break-even point, you’ve made no profit, but you also haven’t incurred any losses. This metric is important for new businesses to determine if their ideas are viable, as well as for seasoned businesses to identify operational weaknesses.

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What is the break-even analysis formula?

The break-even analysis formula requires three main pieces of information:

Fixed costs per month: Fixed costs are what your business has to pay no matter how many units you sell. This could include rent, business insurance , business loan payments, accounting and legal services and utilities.

Sales price per unit: This is the amount of money you will charge the customer for every single unit of product or service you sell. Make sure to include any discounts or special offers you give customers. If you sell multiple products or services, figure out the average selling price for everything combined.

Variable costs per unit: These are the costs you incur for each unit you sell. They may include labor, the price of raw materials or sales commissions, and they are subject to change as sales fluctuate. To calculate, multiply the number of units produced by the costs of producing just one unit.

From there, the break-even point can be calculated in units.

Break-even point in units = fixed costs / (sales price per unit – variable costs per unit)

This gives you the number of units you need to sell to cover your costs per month. Anything you sell above this number is profit. Anything below this number means your business is losing money.

Once you’re above the break-even point, every additional unit you sell increases profit by the amount of the unit contribution margin. This is the amount each unit contributes to paying off fixed costs and increasing profits, and it’s the denominator of the break-even analysis formula. To find it, subtract variable costs per unit from sales price per unit.

» MORE: Best apps for small businesses

Break-even analysis example

Let's say you're thinking about starting a furniture manufacturing business. The first unit you're going to sell is a table. How many tables would you need to sell in order to break even?

If it costs $50 to make a table and you have fixed costs of $1,000, the number of tables you must sell to break even varies depending on price. Here are two scenarios:

If you sell a table at $100: $1,000 / ($100 — $50) = 20 tables

If you sell a table at $200: $1,000 / ($200 — $50) = 6.7 tables

This is a great example of how selling a product for a higher price allows you to reach the break-even point significantly faster. However, you need to think about whether your customers would pay $200 for a table, given what your competitors are charging.

» MORE: NerdWallet’s picks for the best small-business accounting software

When to use break-even analysis

Break-even analysis formulas can help you compare different pricing strategies.

For example, if you raise the price of a product, you’d have to sell fewer items, but it might be harder to attract buyers. You can lower the price, but would then need to sell more of a product to break even. It can also hint at whether it’s worth using less expensive materials to keep the cost down, or taking out a longer-term business loan to decrease monthly fixed costs.

Here are a few specific situations where a break-even analysis is especially useful:

Starting a new business: When starting a business , break-even analysis can help you figure out the viability of your product or service. If you do this analysis along with writing a business plan, you can spot weak points in your company's financial strategy and develop a plan to address them.

Launching a new product or service: Whenever you launch a new product or service, you'll need to determine its sale price and how much it costs to produce it. Using a break-even analysis, you can see how both of these factors affect your profitability. Eventually, you can choose a price that's fair to customers and realistic for your company.

Adding a new sales channel: If your business model changes to incorporate a new sales channel, that's a good opportunity to do a break-even analysis. For example, if you have a brick-and-mortar store but want to start an e-commerce business, your costs and pricing might change. You should make sure you at least break even so that you don't put too much financial strain on your business.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

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What Is the Breakeven Point (BEP)?

Understanding breakeven points, business breakeven points.

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Breakeven Point: Definition, Examples, and How to Calculate

In corporate accounting, the breakeven point (BEP) is the moment a company's operations stop being unprofitable and starts to earn a profit. The breakeven point is the production level at which total revenues for a product equal total expenses. The breakeven point can also be used in other ways across finance such as in trading.

Key Takeaways

• In accounting, the breakeven point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production.
• The breakeven point is the level of production at which the costs of production equal the revenues for a product.
• In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its original cost.
• A breakeven analysis can help with f i nding missing expenses, limiting decisions based on emotions, establishing goals, securing funding, and setting appropriate prices.

Investopedia / Nez Riaz

A breakeven point can be applied to a wide variety of contexts. For instance, the breakeven point in a property would be how much money the homeowner would need to generate from a sale to exactly offset the net  purchase price , inclusive of closing costs, taxes, fees, insurance, and interest paid on the mortgage—as well as costs related to maintenance and home improvements. At that breakeven price, the homeowner would exactly break even, neither making nor losing any money.

Traders also apply BEPs to trades, figuring out what price a security must reach to exactly cover all costs associated with a trade, including taxes, commissions, management fees, and so on. A company’s breakeven point is likewise calculated by taking fixed costs and dividing that figure by the gross profit margin percentage.

The breakeven formula for a business provides a dollar figure that is needed to break even. This can be converted into units by calculating the contribution margin (unit sale price less variable costs). Dividing the fixed costs by the contribution margin will reveal how many units are needed to break even.

Business Breakeven = Fixed Costs Gross Profit Margin \begin{aligned} &\text{Business Breakeven} = \frac { \text{Fixed Costs} }{ \text{Gross Profit Margin} } \\ \end{aligned} ​ Business Breakeven = Gross Profit Margin Fixed Costs ​ ​

Assume a company has $1 million in fixed costs and a gross margin of 37%. Its breakeven point is $2.7 million ($1 million ÷ 0.37). In this breakeven point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. If it generates more sales, the company will have a profit. If it generates fewer sales, there will be a loss.

It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even. To do this, calculate the contribution margin, which is the sale price of the product less variable costs . We'll look at that calculation next.

Breakeven Point and Contribution Margin

The breakeven point is heavily related to a company's contribution margin. The contribution margin is the amount a product's selling price exceeds its variable cost. It's calculated as:

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

This margin indicates how much of each unit's sales revenue contributes to covering fixed costs and generating profit once fixed costs are met. For example, if a product sells for $10 but only incurs $3 of variable costs per unit, the product has a contribution margin of $7. Note that a product's contribution margin may change (i.e. it may become more or less efficient to manufacture additional goods).

The relationship between contribution margin and breakeven point is that even a dollar of contribution margin chips away at a company's fixed cost. A higher contribution reduces the number of units needed to break even because each unit contributes more towards covering fixed costs. Conversely, a lower contribution margin increases the breakeven point, requiring more units to be sold to cover fixed costs.

Let's look at one more example. In the example above, our contribution margin per unit was $7. Assume a company has $70,000 of fixed costs. The company must sell 10,000 units to break even. If the company can increase its contribution margin per unit to $8 (by perhaps lowering its per unit variable cost), it only needs to sell 8,750 ($70,000 / $8) to break even.

Note that in the prior example, the fixed costs are "paid for" by the contribution margin. The more profit a company makes on its units, the fewer it needs to sell to break even.

Benefits of a Breakeven Analysis

A breakeven analysis can help with many things, including:

• Finding Missing Expenses: A break-even analysis can help uncover expenses that you otherwise might not have seen coming. Your financial commitments will be determined at the end of a breakeven analysis, so there won’t be any surprises down the line.
• Limiting Decisions Based on Emotions: Making business decisions based on emotions is rarely a good idea, but it can be hard to avoid. A break-even analysis leaves you with hard facts, which is a better viewpoint from which to make business decisions.
• Setting Goals: You will know exactly what kind of goals need to be met to make a profit after a breakeven analysis. This helps you set goals and work toward them.
• Securing Funding: Often, you will need to use a break-even analysis to secure funding and show investors the plan for your business.
• Pricing Appropriately . A break-even analysis will show you how to properly price your products from a business standpoint.

Limitations of Breakeven Point

While the breakeven point is a valuable tool for decision-making, it has several limitations. One major downside is its reliance on the assumption that costs can be neatly divided into fixed and variable categories. In reality, some costs may not fit cleanly into these categories. For example, semi-variable costs , which have both fixed and variable components, can complicate the accuracy of the breakeven calculation which then changes the breakeven point in units.

Another limitation is that the breakeven point assumes that sales prices, variable costs per unit, and total fixed costs remain constant, which is often not the case. The price of goods sold at fluctuates, and the cost of raw materials may hardly stay stable. In addition, changes to the relevant range may change, meaning fixed costs can even change. This makes it almost impossible to always have a most up-to-date, accurate breakeven point.

Finally, the breakeven analysis often ignores qualitative factors such as market competition, customer satisfaction, and product quality. While the breakeven point focuses on financial metrics, successful business decisions also require a holistic view that looks outside the number. For example, it may just not be feasible to sell 10,000 units given the current market for the example above.

Assume an investor buys Microsoft stock ( MSFT ) at $110. That is now their breakeven point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money. If the price stays right at $110, they are at the BEP because they are not making or losing anything. Options can help investors who are holding a losing stock position using the option repair strategy .

Call Option Breakeven Point Example

For options trading, the breakeven point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is reached when the underlying asset is equal to the strike price plus the premium paid, while the BEP for a put position is reached when the underlying asset is equal to the strike price minus the premium paid. The breakeven point doesn’t typically factor in commission costs, although these fees could be included if desired.

Assume that an investor pays a $5 premium for an Apple stock ( AAPL ) call option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire . The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, then the benefit of the option has not exceeded its cost.

If the stock is trading at $190 per share, the call owner buys Apple at $170 and sells the securities at the $190 market price. The profit is $190 minus the $175 breakeven price, or $15 per share.

Put Option Breakeven Point Example

Assume an investor pays a $4 premium for a Meta (formerly Facebook) put option with a $180 strike price. That allows the put buyer to sell 100 shares of Meta stock ( META ) at $180 per share until the option’s expiration date. The put position’s breakeven price is $180 minus the $4 premium, or $176. If the stock is trading above that price, then the benefit of the option has not exceeded its cost.

If the stock is trading at a market price of $170, for example, the trader has a profit of $6 (breakeven of $176 minus the current market price of $170). 

What Is a Breakeven Point?

A breakeven point is used in multiple areas of business and finance. In accounting terms, it refers to the production level at which total production revenue equals total production costs. In investing, the breakeven point is the point at which the original cost equals the market price. Meanwhile, the breakeven point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss.

Why Is Breakeven Point Important?

The breakeven point is important because it identifies the minimum sales volume needed to cover all costs, ensuring no losses are incurred. It aids in strategic decision-making regarding pricing, cost control, and sales targets.

How Do You Calculate a Breakeven Point?

Generally, to calculate the breakeven point in business , fixed costs are divided by the gross profit margin. This produces a dollar figure that a company needs to break even. When it comes to stocks, for example, if a trader bought a stock at $200, and nine months later, it reached $200 again after falling from $250, it would have reached the breakeven point.

How Do You Calculate a Breakeven Point in Options Trading?

Consider the following example in which an investor pays a $10 premium for a stock call option, and the strike price is $100. The breakeven point would equal the $10 premium plus the $100 strike price, or $110. On the other hand, if this were applied to a put option, the breakeven point would be calculated as the $100 strike price minus the $10 premium paid, amounting to $90.

A breakeven point tells you what price level, yield, profit, or other metric must be achieved not to lose any money —or to make back an initial investment on a trade or project. Thus, if a project costs $1 million to undertake, it would need to generate $1 million in net profits before it breaks even.

Calculating breakeven points can be used when talking about a business or with traders in the market when they consider recouping losses or some initial outlay. Options traders also use the technique to figure out what price level the underlying price must be for a trade so that it expires in the money . A breakeven point calculation is often done by also including the costs of any fees, commissions, taxes, and in some cases, the effects of inflation .

OpenStax, Rice University. " Principles of Accounting, Volume 2: Managerial Accounting; 3.2 Calculate a Break-Even Point in Units and Dollars ."

CME Group Education. " Explaining Put Options (Short and Long) ."

CME Group Education. " Explaining Call Options (Short and Long) ."

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A Quick Guide to Breakeven Analysis

It’s a simple calculation, but do you know how to use it?

In a world of Excel spreadsheets and online tools, we take a lot of calculations for granted. Take breakeven analysis. You’ve probably heard of it. Maybe even used the term before, or said: “At what point do we break even?” But because you may not entirely understand the math — and because understanding the formula can only deepen your understanding of the concept — here’s a closer look at how the concept works in reality.

• Amy Gallo is a contributing editor at Harvard Business Review, cohost of the Women at Work podcast , and the author of two books: Getting Along: How to Work with Anyone (Even Difficult People) and the HBR Guide to Dealing with Conflict . She writes and speaks about workplace dynamics. Watch her TEDx talk on conflict and follow her on LinkedIn . amyegallo

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Break-Even Analysis Explained—How to Find the Break-Even Point

Posted november 2, 2022 by kiara taylor.

Conducting a break-even analysis is a crucial tool for small business owners. If you’re planning on launching a business, writing a business plan , or just exploring a new product, knowing your break-even point can tell you whether or not a product or service is a good idea.

In this guide, we’ll cover what a break-even point is, why it’s critical to calculate, how to calculate it, and additional factors you should consider. 

What is the break-even point?

The break-even point is where an asset’s market price equals its original cost. Put another way; the break-even point is when the total revenues of a certain production level equal the total expenses of producing that product. For small business owners, it’s essentially the amount that you need to earn in order to cover your costs.  

Why you should know your break-even point

So, why is knowing your break-even point so important? Here are a few important reasons to consider.

Minimize risk

Risk comes in various forms , but break-even points can help you understand the viability of certain products before they’re even launched. 

For example, before even sending an order to a factory, you can already know how many units you need to sell and what expenses will go into making that product. Understanding this is key whether you’re launching a business for the first time or starting a new product line.

Identify unseen expenses

Running a break-even analysis forces you to outline all potential expenses associated with an initiative. Expenses that you’d otherwise miss without it. Usually, these expenses come from the fixed and variable costs of production. In this process, you can often identify unexpected expenses that you may not have considered before.

Appropriately price your products/services

Because your break-even point concerns the price relationship to your expenses, you can calculate different break-even points based on sold units or different pricing schemes. For example, you may find that your product is unprofitable at a certain price point except at extremely large scales. 

If that’s the case, you can explore higher price points. However, it’s important that you do not do this in isolation. Instead, use this exercise to understand potential pricing options and begin testing them with your target customers .

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If you’re seeking funding for your business, this information is often expected or required by lenders and investors . It helps them gauge the viability of your idea and determine what level of funding is appropriate. For you as a business owner, it can help you determine how much funding you think you’ll need and even identify how you’ll use those funds.

How to calculate the break-even point

To calculate your break-even point, you’ll need to know the following: 

• Fixed costs: Expenses that remain consistent no matter your sales volume.
• Variable costs: Expenses that change depending on your sales/production volume.
• Sales price: The price that you intend to sell the product/service for.

Break-even point formula

The break-even point is calculated using your fixed costs and your contribution margin. The contribution margin is the selling price of the product minus the total variable costs. Your selling price is usually the amount you place on any customer invoices. 

The contribution margin formula is:

Contribution Margin = Selling Price – Total Variable Costs

Once you have the contribution margin, you then take the total fixed costs per unit and divide those costs by the contribution margin. This will give you the break-even number of units required to offset your costs.

The break-even point formula is:

Break-Even Point = Fixed Costs / Contribution Margin

Break-even point example

Now that you know the formula for calculating your break-even point let’s put it into practice.

Imagine you are the owner of a small paper company and considering adding a new line of paper to your available products. You expect to sell a ream of paper for $5.00. 

The variable costs of the ream of the paper include: 

• $1.00 for the paper itself
• $0.50 for the packaging of the ream
• $0.50 of costs to package each ream

According to this information, you have $2.00 in variable costs. Using the formula mentioned above, we can calculate the contribution margin for your paper ream:

$5.00 – $2.00 = $3.00

Next, we’ll incorporate fixed costs to determine how many units need to be sold. After holding an office meeting in the conference room, you determine that the following fixed costs are associated with producing reams of paper:

• $50.00 in salaries
• $50.00 in office rent
• $50.00 for monthly shipments from the paper factory

Your total fixed costs come to: $50.00 + $50.00 + $50.00 = $150.00.

Lastly, we’ll calculate the break-even point: $150.00 / $3.00 = 50 units. To break even, you would need to sell 50 reams of paper. 

Maximizing your break-even point formulas

You can also utilize this calculation to figure out your break-even point in dollars. This is done by dividing the total fixed costs by the contribution margin ratio. You can figure out your contribution margin ratio by taking the contribution margin per unit and dividing it by the sales price. 

Your contribution margin ratio using the data from the above example is:

$3.00 (your contribution margin) / $5.00 (price per one ream of paper) = 60%.

Finally, divide your total fixed costs ($150.00) by your contribution margin ratio (60%) to calculate the break-even point in dollars:

$150.00 / 60% = $250.00 in sales

You can confirm your findings by multiplying your break-even point in units (50) by the sales price ($5.00):

50 x $5.00 = $250.00

What is a standard break-even time period?

The standard break-even period is hard to predict and fully depends on your business. However, once you know your break-even point, you can gauge the time it will take to break even more accurately.

Your break-even period is the amount of time it takes you to sell enough units to break even. This means that the only thing holding back your ability to break even is how fast you sell your units.

The formula to calculate your break-even time period is:

Break-Even Time Period = Break-Even Units / Amount Sold per Period (Period)

If we return to the paper company example, we can estimate what the break-even period is. After reviewing your financials, you learn that the average number of reams you expect to sell daily is 5. Now, take your number of break-even units (50) and divide them by the amount sold in a given period (5):

50 / 5 = 10. Under this analysis, you would break even in approximately 10 days.

However, it’s important to remember that fixed costs, which are an important part of calculating your break-even point, may accumulate faster than you can sell your product. In that case, you’ll need to factor this into your analysis.

How to lower your break-even point

Everyone wants to lower their break-even point because it typically leads to greater profitability at a faster rate. But how do you lower your break-even point? The key thing to remember is that it’s a ratio of your fixed and variable costs. To reduce your break-even point, you’ll need to lower one or both.

One of the most efficient ways to reduce your break-even point is to start by reducing variable costs. Keep in mind that variable costs are associated with each unit. Other fixed costs, those that exist regardless, like the $20-$80 you pay for your employees’ no medical life insurance every month, can be more difficult to eliminate because they are essential.

What you can do with a break-even analysis

Conducting an initial break-even analysis is incredibly useful when starting a business. But, did you know that you can use it on an ongoing basis as part of your management process ? Here are a few key uses you can leverage.

Determine if your prices are correct

A break-even analysis can be used to continuously audit and fine-tune your pricing strategy. If you find sales are missing expectations, you can reference this calculation to easily understand what quantities must be sold if you decide to adjust the price. 

Explore current fixed and variable costs

You can also explore how different costs impact your bottom line. At the end of the day, your business needs to know what costs are impacting its ability to generate revenue. A break-even analysis can help you understand whether some products may be costing you more money than their worth. For example, products with low contribution margins or ratios might be too expensive to keep in production.

Narrow down financial scenarios

Finally, you can use your break-even analyses as part of any forecast scenarios that you explore. By changing numbers in your formula, you can test different types of prices and quantities based on perceived consumer interest. This can help inform a larger analysis of your sales, cash, and expenses based on how reasonable your price and volume adjustments are.

Other metrics to consider

Now that you understand break-even points and break-even analysis, you’ll be able to put them to work for your business. Remember, this is just a piece of measuring business performance and there are other valuable metrics you should be tracking. You can do this manually with spreadsheets, leverage budgeting and accounting software, or better explore future performance with LivePlan’s performance tracking and forecasting features .

Whatever option you choose, the important thing is that you are aware of these metrics and actively using them. It will help you better understand the health of your business, make more strategic decisions, and ultimately grow your business.

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What is a Break-Even Point and How to Calculate

Brendan Tuytel

Reviewed by

December 4, 2020

This article is Tax Professional approved

"When will we actually make money?" is the burning question for new businesses. Fortunately, you can answer this question by calculating your break-even point.

I am the text that will be copied.

What is the break-even point?

The break-even point (BEP) is the amount of product or service sales a business needs to make to begin earning more than you spend. You measure the break-even point in units of product or sales of services.

You can use the break-even point to find the number of sales you need to make to completely cover your expenses and start making profit. If you sell more than your break-even point, you’re making a profit. But if you sell less, your sales revenue won’t cover your expenses and you’ll operate at a loss.

How to calculate the break-even point

The break-even point is calculated using three values.

Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume. Some common fixed costs are your rent payments, insurance payments and money spent on equipment. These costs will stay the same regardless of whether you sell one unit or a million units.

Your variable costs (or variable expenses) are the expenses that do change with your sales volume. This is the price of raw materials, labor, and distribution for the goods or service you sell. For a coffee shop, the variable costs would be the beans, cups, sleeves, and labor used to produce one cup of coffee.

Your sales price is just the price that you sell your product or service for.

Break-even point formula

The break-even point formula is:

Break-even point = Total fixed costs / (Sales Price Per Unit - Variable costs per unit)

Sales price per unit minus the variable costs per unit is also known as the contribution margin.

You can find your fixed costs and variable costs using your income statement .

For your fixed costs, simply add up your monthly recurring costs (like rent, web hosting, and salaries).

To find your variable costs per unit, start by finding your total cost of goods sold in a month. If you have any other costs tied to the products you sell—like payments to a contractor to complete a job—add them to your cost of goods sold to find your total variable costs. Then divide that number by the units you’ve sold that month.

Break-even point example

Maggie’s Mugs sells artisanal mugs out of a brick and mortar store. The selling price of her mugs is $20. Maggie pays artists to paint mugs for $10 a piece. Maggie buys mugs for $5 a piece. This makes her variable costs $15 a mug.

Maggie also pays $800 a month on rent, $200 in utilities, and collects a monthly salary of $1,500. This makes her fixed costs $2,500 a month.

With her shop opening next month, Maggie wants to know how many mugs she needs to sell in order to be profitable. Let’s put her price and costs into the break-even point formula:

Break-even point = Total fixed costs / (Selling Price Per Unit - Variable costs per unit)

Break-even point = $2,500 / ($20 - $15)

Break-even point = $2,500 / 5 = 500 units

Now Maggie knows she needs to sell 500 mugs to break even. If she sells more than that, she will have a profitable month.

Decisions you can make from break-even analysis

If you’re having trouble hitting your break-even point or it seems unreachable, it’s time to make a change.

There are three components to calculating your break-even point. By looking at each component individually, you can start to ask yourself critical questions about your pricing and costs.

Here are three questions you can start with.

Is your sales price right?

As you increase your sales price, your break-even point decreases. If your sales price is too low, you might have to sell too many units to break even. And as much as we think a lower price means more buyers, studies actually show that consumers rely on price to determine the quality of a product or service.

If your price is too high, you might be falling short of your break-even point because customers won’t buy at that price. Lowering your selling price will increase the sales needed to break even. But this can be offset by the increased volume of purchases from new customers.

Are your fixed costs too high?

Having high fixed costs puts a lot of pressure on a business to make up those expenses with sales revenue. If you find yourself falling short of your break-even point month over month and feel like you can’t change your prices, lowering your fixed costs can be a solution.

Here are some common ways to reduce your fixed costs:

• Relocate to an area with cheaper rent or property taxes
• Negotiate lower lease payments with your landlord
• Sub-lease a portion of your space
• Look for lower cost insurance plans
• Refinance and reduce debt to reduce your interest costs

For more cost cutting ideas, check out our guide of 25 ways to cut costs.

Is my cost per unit sustainable?

The higher the variable costs, the greater the total sales needed to break even.

For the example of Maggie’s Mugs, she paid $5 per mug and $10 for them to be painted. If she keeps falling short of the 500 units needed to break even, she could potentially find a cheaper mug supplier or painters who are willing to take a lesser payment. By reducing her variable costs, Maggie would reduce the break-even point and she wouldn’t need to sell so many units to break even.

Here are some common ways to reduce your variable costs:

• Spend less on raw materials: Try finding vendors with lower prices or discounts for buying in bulk. If your order will be too small for bulk discounts, look for other businesses you can form a buying group with.
• Spend less on labor: Consider switching to contractors that you pay per job or per unit—that way you can guarantee the variable costs
• Reduce your cost of distribution: Make sure you’re using the cheapest shipping option and the cheapest packaging.

Additional resources

• Starting a Business in 2022 - The Resources Your Startup Needs
• FIFO: The First In First Out Inventory Method
• Working Capital: What It Is and How to Calculate It
• How to Make the Most of Your Bookkeeping Solution

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What Is a Break-Even Analysis?

3 min. read

Updated October 27, 2023

The break-even analysis lets you determine what you need to sell, monthly or annually, to cover your costs of doing business—your break-even point.

• Understanding break-even analysis

The break-even analysis is not our favorite analysis because:

• It is frequently mistaken for the payback period, the time it takes to recover an investment. There are variations on break even that make some people think we have it wrong. The one we do use is the most common, the most universally accepted, but not the only one possible.
• It depends on the concept of fixed costs, a hard idea to swallow. Technically, a break-even analysis defines fixed costs as those costs that would continue even if you went broke. Instead, you may want to use your regular running fixed costs, including payroll and normal expenses. This will give you a better insight on financial realities. We call that “burn rate” these post-Internet days.
• It depends on averaging your per-unit variable cost and per-unit revenue over the whole business.

Over the past few years, the break-even analysis has fallen out of favor with financial analysts. It is okay when done right, can be useful, but not for all businesses and not for all situations. And, to add to the confusion, the term “break-even” is often used to refer to “payback” or “payback period.”  And there are several ways to do the analysis. But what is shown here is the most common.

• Three assumptions of the break-even analysis

The break-even analysis depends on three key assumptions:

1. Average per-unit sales price (per-unit revenue):

This is the price that you receive per unit of sales. Take into account sales discounts and special offers. Get this number from your sales forecast.

For non-unit based businesses, make the per-unit revenue one dollar and enter your costs as a percent of a dollar. The most common questions about this input relate to averaging many different products into a single estimate.

The analysis requires a single number, and if you build your sales forecast first, then you will have this number. You are not alone in this, the vast majority of businesses sell more than one item, and have to average for their break-even analysis.

2. Average per-unit cost:

This is the incremental cost, or variable cost, of each unit of sales. If you buy goods for resale, this is what you paid, on average, for the goods you sell. If you sell a service, this is what it costs you, per dollar of revenue or unit of service delivered, to deliver that service.

If you are using a units-based sales forecast table (for manufacturing and mixed business types), you can project unit costs from the sales forecast table. If you are using the basic sales forecast table for retail, service and distribution businesses, use a percentage estimate, e.g., a retail store running a 50 percent margin would have a per-unit cost of .5, and a per-unit revenue of 1.

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3. Monthly fixed costs:

Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, we recommend that you use your regular running fixed costs, including payroll and normal expenses (total monthly operating expenses). This will give you a better insight on financial realities.

If averaging and estimating is difficult, use your profit and loss table to calculate a working fixed cost estimate—it will be a rough estimate, but it will provide a useful input for a conservative break-even analysis. As sales increase, the profit line passes through the zero or break-even line at the break-even point. This is a classic business chart that helps you consider your bottom-line financial realities. Can you sell enough to make your break-even volume?

The break-even analysis depends on assumptions made for average per-unit revenue, average per-unit cost, and fixed costs. These are rarely exact. We recommend that you do the break-even table twice; first, with educated guesses for assumptions, as part of the initial assessment, and later on, using your detailed sales forecast and profit and loss numbers. Both are valid uses.

Do you have any questions about running a break-even analysis? 

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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Ownr Blog  > Ownrship 101  > Business Stages  > Managing Your Business  > Accounting and Tax  > The Importance of Break-Even Point for Business Owners

The Importance of Break-Even Point for Business Owners

As a small business owner, making sales, no matter how successfully, doesn’t ensure your business will make a profit if you don’t understand basic accounting principles. Knowing your break-even analysis is one such principle that can help you make important financial decisions about your business by determining when you will break-even on your investment, and start making a profit. 

• What is a break-even point (BEP) for a business?

A breakeven point is when total costs and total revenue are equal.  It’s the sales level you need to reach to cover all of your costs. Your business cannot be profitable until it has reached this point. 

• What is a break-even analysis?

A breakeven analysis is a calculation that tells small business owners what quantity of product must be sold to be profitable. It helps entrepreneurs come up with a pricing strategy that will not only cover costs but will generate a gross profit .

• How to calculate break-even point

To identify your business’s break-even point per product or service, you must identify all your costs—for both operating your business and making your product. Here’s the formula for a break-even analysis that calculates how many products you need to sell to break even:

Break-even point in quantity of units sold = Fixed costs/(Price per unit – Variable cost per unit)

• Types of costs

It’s essential to include all the fixed and variable costs of your business to calculate a break-even point. 

Fixed costs

Fixed costs are the costs that stay the same, regardless of other factors like production output. Rent and insurance could be two examples of fixed costs.=

Variable costs

Variable costs depend on how much product is produced and sold. If you manufacture or sell a higher quantity of your product, the variable cost will increase, and vice versa. Raw materials and payment processing fees are two examples of variable costs.

• How Can Ownr Help?

Looking for an easy-to-use, visual solution to your break even point analysis? Blueprint has you covered. Blueprint is our totally free business plan generator that walks you through 10 modules related to different areas of your business – including your financial overview. Simply plug in your startup, fixed, and variable costs, and Blueprint can help you determine your break even point. You can use our handy visualizer to test out different scenarios and find the right solution for your business.

• Types of break-even calculations

You can investigate different options for your business using the break-even point. Here are four ways to calculate a break-even point using the formula above.

• Quantity of sales: how many units will I have to sell to reach the break-even point?
• Price per unit: how will changing the sales price per unit affect my break-even point? 
• Variable costs: how will changing my variable costs per unit affect my break-even point? 
• Fixed costs: how will changing my overall fixed costs affect my break-even point?
• Example of a break-even analysis

Imagine a child’s lemonade stand has a fixed cost of $10 per month in rent, paid to the parents. Each glass of lemonade sells for $1, and the variable cost per unit is $0.10 for lemonade ingredients.

Calculation of break-even point by unit

How many glasses of lemonade need to be sold per month to become profitable?

Break-even point in glasses sold = Fixed costs/(Sales price per unit – Variable cost per unit) 

10/(1 – 0.10) = Break-even point

Breakeven quantity of sales = 11.11

The break-even analysis indicates the lemonade stand will break even when a little over 11 glasses of lemonade are sold, and will make a profit when 12 glasses of lemonade are sold.

Calculation of break-even point by sales price per unit

Should the child increase the price per unit? While this will depend on a variety of market conditions, break-even analysis can also come in handy here.

Remember our trusty formulas:

Fixed costs/(Sales price per unit – Variable cost per unit) = Break-even point

Say we want the break-even quantity of sales to be 10, and not 11.

10/(Sales price per unit – 0.10) = 10

Sales price per unit = $1.10

In this case, if the child wanted to reach a break-even point at  10 glasses of lemonade, without changing any other variables, the price needs to go up to $1.10 per glass of lemonade.

Calculation of break-even point by fixed costs

Let’s say the lemonade business is booming, and it’s time to hire a sibling at a fixed salary of $1 per month. How will this affect the break-even point? How many glasses of lemonade need to be sold at $1 each to break even?

Fixed costs are now $11 instead of $10.

11/(1 – 0.10) = Break-even point

Breakeven quantity of sales = 12.22

If the child’s fixed costs increase by $1 per month, and the selling price remains the same, then just over 12 glasses of lemonade need to be sold to break even, and 13 need to be sold to make a profit.

Calculation of break-even point by variable costs per unit

Now say there is a lemon shortage, and the variable cost per unit increases to $0.50. How many glasses of lemonade will the child need to sell to reach the break-even point?

10/(1 – 0.50) = Breakeven quantity of sales

Breakeven quantity of sales = 2

If the variable cost per unit increases to $0.50, the child will have to sell 20 glasses of lemonade to break even and at least 21 to make a profit.

• Why is a break-even analysis important?

As the examples above illuminate, there are many ways a break-even analysis can impact an entrepreneur’s business decisions. It can help ascertain how variables in cost, price, and quantity sold can impact your business’s profitability.

• Cost calculation

A break-even analysis can help you to determine whether your business will remain profitable if you increase your company’s fixed costs—if you choose to move to a bigger and more expensive office space, for instance, or hire another salaried employee.

• Budgeting and setting targets

A break-even analysis can help you budget by providing an estimate of your profitability in an upcoming month, quarter, or year.

• Motivational tool

A break-even analysis can help you to set sales benchmarks and, hence, motivate you to work harder when you know the profitability of your business is at stake.

• Margin of safety

A margin of safety is the difference between the amount of expected profitability and the break-even point. By comparing the break-even point with the expected profitability you can easily flag when sales aren’t on track to be profitable.

Keep in mind, this information may change over time due to market conditions, and therefore it’s worth conducting a break-even analysis of all of your products and services on a regular basis.

• Tips for lowering your break-even point

If the results of your initial break-even analysis aren’t what you had hoped for, let’s look at how you can change your current plan to reach a break-even point that works for your business.

• Reduce fixed costs

If your business has a high number of fixed costs, it can create a lot of pressure on expenses with sales revenue. The more you can reduce fixed costs, the less revenue your business will need to earn to break even. 

For example, if you’re considering opening a storefront but the rent for your preferred space represents a high fixed cost for your business, you might opt for a smaller storefront or explore subleasing a portion of your space. 

• Reduce variable costs

Variable costs, such as manufacturing or shipping, fluctuate based on your sales volume. To reduce your variable costs, you might consider negotiating a lower cost by offering to purchase a minimum quantity every month.

If you sell a product, you could research lower-cost materials to manufacture your goods or investigate more affordable shipping methods. 

It can sometimes be easier for more established businesses to reduce their variable costs because they can often negotiate volume purchase discounts with their suppliers.

• Increase your selling price

If you’re unable to break even based on the current price of your product or service, you may need to increase that price. By raising your price, you reduce how much you need to sell in order to break even. 

When evaluating this option, it’s important to consider what your customers are willing to pay and how their expectations may change if your product or service goes up in price. For example, your customers may expect a higher-quality product or more responsive customer service. 

In some cases, your sales volume may decline as your prices go up, but as long as the increase in price is greater than the dip in sales volume, it may still be the right option for your business.

• Improve your sales mix

Rather than raising prices across the board, if your business sells multiple products or services, you could focus on increasing the sales of products and services with high contribution margins.

This might mean pivoting your marketing efforts to emphasize high-margin products or, if you employ salespeople, increasing commissions on these higher-ticket items. 

• What are the limitations of a break-even analysis?

Breakeven analysis is a helpful tool for many entrepreneurs, but it’s important to know its limitations when using this calculation in your business plan.

• Doesn’t account for customer demand

A break-even analysis can offer a sense of how much you need to sell to break even, but it doesn’t tell you if your business can actually succeed in selling everything it produces.

Consumer demand for particular products and services is rarely stable over time, which means customer interest in your business may go up and down. 

Many businesses end up with unsold stock. In addition to losing money by paying to produce items that don’t sell, this may also create additional storage or insurance costs for your business. 

The break-even analysis calculation also doesn’t account for new competitors entering the market that could impact the demand for your product or compel you to re-evaluate your pricing model to be more competitive.

• May not work for businesses with multiple products

While break-even analysis for a single product is fairly straightforward, the calculation gets more complex if your business sells more than one product or service. 

If your business offers more than one product or service, your fixed and variable costs may be split among various products. It can be challenging to decide which products to assign to which costs to perform your break-even analysis. 

A break-even analysis is most useful for businesses that sell one product. Entrepreneurs who sell multiple products, on the other hand, may find the calculation limiting. 

• Less effective for long-term planning

The break-even analysis can be useful for short-term planning but its accuracy tends to diminish over time as the costs used in your initial calculation naturally fluctuate.

For example, rent could increase, interest rates on your business loans could rise or fall, or your suppliers’ prices might increase or decrease.

A break-even analysis represents a snapshot of your business at a single point in time, limiting its ability to help you plan for the future. 

• Key takeaways

A break-even analysis is a simple tool for entrepreneurs to estimate their business’s profitability. By understanding the variables impacting your break-even point, you can better evaluate elements of your pricing model that may need adjusting to give your business the best possible chance to earn a profit. 

This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.

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How to Do a Business Plan Break Even Analysis for Beginners

Are you currently writing a business plan and want to do break even analysis? If YES, here’s a beginner’s guide on how to calculate break even point for a business.

Every business is established with the aim of making profits. No entrepreneur wants to go through the stress of establishing and running a business that would not be able to pay its bills after a particular time frame. This is the major reason why it is very pertinent to run a break even analysis whenever one thinks of starting a business.

What is a Break Even Analysis?

Break even analysis is a calculation that will tell you how many units of products you need to sell or how many people you have to offer services to in order to break even in your business. In essence, your break-even point is the sales level that is required for your business to operate without incurring financial loss. To succeed in any business you are doing, it is pertinent to determine this point as the viability of your business is reliant on staying above this number.

For instance, as an entrepreneur selling umbrellas, you need to know how many umbrellas you need to sell to cover your overhead costs. You need to know that anything you sell above your break-even point will mean profit for your business.

A break-even analysis is a key part of any good business plan as it would help you know if your business idea is worth pursuing, and it can remain helpful in the long run as a way to figure out the best pricing structure for your products.

It is a fact that experienced entrepreneurs would not even think of starting a business until they are sure, from their break-even analysis, that their predicted revenue would be greater than their costs, and that they can break even at a certain point that is predictable. Once this point is established, the entrepreneurs can then continue creating their business plans. A break-even analysis is the best way to determine whether your business idea is a winner or a loser.

A company can be said to have achieved break even when its total sales or revenue equals its total expenses. No profit has been made at the break even point, and no losses have been incurred either. It should be noted that any revenue that is made above the breakeven point is pure profit for the business.

4 Times When It is Important to Carry Out Break Even Analysis

• When starting a new business

Like we have already established, whenever you want to start a new business, your first thoughts should go to conducting break even analysis. Not only will it help you decide if your business idea is viable, but it will force you to do research and be realistic about costs, as well as think through your .

• When you want to create or introduce a new product line

If you already have a running business, you are still required do a break-even analysis before adding a new product line, especially if that product is expected to add significant expenses to your business. Even if your fixed costs, like an office lease, stay the same, you will need to work out the variable costs related to your new product and set prices before you start selling.

• When adding a new sales channel

Any time you add a new sales channel, your costs will change—even if your prices don’t. For example, if you have been selling online and you are now thinking about opening a pop-up shop, you will have to make sure you at least break even so as not to add a strain to your business.

• When changing your

If you are thinking about changing your business model, for example, switching from a retail store to eCommerce, you are required to do a break-even analysis. Your costs could change significantly and this will help you figure out if your prices need to change too.

When conducting a break-even analysis, you need to take note of certain variables. The first step basically is to list all your costs of doing business. You need to put down everything, from the cost of your product, to rent, to bank fees and others. Think through everything you have to pay for and write it down.

The next step is to divide them into fixed costs and variable costs.

• Fixed Costs

Fixed costs are any costs that stay the same regardless of how much products you sell. This could include things like rent, software subscriptions, insurance, deposits or contingency funds and labour. You have to make a list of everything you have to pay for no matter what.

In most cases, you can list the expenses as monthly amounts unless you are considering an event with a shorter time frame. If you are starting your business from the scratch, you should never rely on guesswork to estimate your costs. You can check with trade associations for information on average costs in your particular industry.

• Variable Costs

Variable costs are costs that fluctuate based on the amount of products you sell. This could include things like materials, commissions, payment processing, labour, shipping costs of the product, and inventory etc.

Some costs could go in either category, depending on your business. If you have salaried staff, they will go under fixed costs. But if you pay part-time hourly employees who only work when it’s busy, then they will be considered as variable costs.

• Average price per unit

Finally, you need to decide on a price for your product. Don’t worry if you are not ready to fix a final price yet, you can change this later. Keep in mind that this is just the average price. If you offer some customers bulk discounts, it will lower the average price. To determine your price, consider these factors:

• What is your competition selling the same thing for?
• Do you want to be at the low, middle, or high end of the price range?
• What is your cost for the unit, and how much profit do you want to make above that?

You can also use informal focus groups to see what people might be willing to pay for your wares or services.

Importance of the Breakeven Point for Businesses

It is very possible for a business to be turning over a lot of money and still be running at a loss. By determine your breakeven point, you will be able to decide the appropriate price, sales budget to have and it also helps in preparing the business plan. The breakeven point analysis is a very useful parameter for determining the critical profit driver for your business including sales volume, average production costs and average sales price.

The other importance of a breakeven point is that it will help you to be able to:

• Determine the productivity of the current product or service you are into
• Know how far you can sustain declining sales in your business before you will start incurring loses.
• Know how many units of your products that you will need to sell before you will be able to make profits
• Know how reduction of sales volume or price will affect your business
• Know how much of an increase in price or volume of sales you will need to make up for an increase in fixed costs.

Calculating Your Break-Even Point

In order to determine your break even point, you will have to arrange the above figures into a break-even analysis formula. A breakeven analysis formula looks like this:

• Break-even point = fixed costs / (average price per unit – variable costs)

Using the formula above, and using the example of an entrepreneur that retails shoes. Let’s just say his fixed costs are $2,000 a month, and his average sales price is $100. It costs him $40 to buy each shoe, which leaves $60. Divide that into $2,000 (monthly fixed costs) and the entrepreneur must sell 33 shoes a month to break even. Any units he sells above that are profit.

Another example, if you have a business that is selling digital information products online at a rate of $100 (that is, the selling price is equal to $100), and the variable cost is $20 and the fixed cost for a particular period in question is $2,000. To get the breakeven point in number of units, you should divide the fixed cost by the contribution.

To get the contribution or gross profit, you will have to subtract the selling price ($100) by the variable cost ($20) which will give you $80. Therefore dividing the fixed cost ($2,000) by the contribution ($80) will give you a breakeven point of 25 units (2,000 ÷ 80 = 25). What this answer means is that 25 units of the information product must be sold in order to cover the costs of running the business.

What Will Happen to the Breakeven Point If Sales Change?

So, what would be the fate of your breakeven point in the event that sales change? Take for instance, if the economy of the country was in recession, the sales that the business has may drop. If this should happen, then you may stand the risk of not selling enough to meet your breakeven point.

Using the business that is selling digital information products above as an example, you might not sell up to the 25 units that are needed in order to breakeven. In this scenario, you will not be able to pay all your expenses, so what can you do to remedy this situation?

There are two possible solutions to this problem. You can either decide to raise the price of your product or you can find ways to cut your costs, both fixed and variable.

• Analyzing your Outcomes

A break even analysis is not just conducted for fun, the analysis if done well is meant to speak volumes about your intended business. In this wise, it’s important to understand what the result of your break even analysis is telling you. The above analysis has told us that the entrepreneur will break even in business when he sells 33 pairs of shoes in a month. This is great, but the next step is to decide whether this can be done at a particular point in time.

If you don’t think that you can sell 33 pairs of shoes within one month as dictated by your financial situation, patience, personal expectations, location and other variables, then this may not be the right business for you. This is because the business would not be able to produce the cash that would sustain it.

If your break-even point is higher than you expected but you still have hopes for the business, you may consider manipulating certain factors to yield a desirable break-even point. You can consider shopping around for less expensive shoes, reducing the number of, or eliminating employees altogether, working from home and raising your sales price.

If after changing some of these factors your break-even point is still too high, then your business idea may not be attainable. This realization is what makes break-even analyses so important. If you end up scratching your supposed business plan, then know that you have saved yourself a lot of time, effort and money.

Furthermore, you need to understand that a break even analysis cannot accurately predict demand. If you go to the market with the wrong product or the wrong price, it may be tough to ever hit your break-even point.

Drawbacks of Break-Even Analysis

Though conducting breakeven analysis for your business is quite necessary before even writing business plan , it is a fact that this analysis also has its drawbacks or limitations. Some of these drawbacks include;

• It doesn’t take note of future changes

One typically ignores the future when calculating breakeven analysis. Although your analysis would show you how many units of products you need to sell over the course of the month, but you won’t see how things would change if your sales fluctuate week to week.

And it won’t tell you how the fluctuation would affect your break-even point. It also doesn’t take the future into account. Break-even analysis only looks at here and now. If your raw materials cost doubles next year, your break-even point will be a lot of higher unless you raise your prices. If you raise your prices, you could lose customers.

• It cannot predict demand

It’s important to note that a break-even analysis cannot predict market demand. It won’t tell you how much you are going to sell at a particular point in time, or how many people will even want what you are selling. It will only tell you how many units you need to sell in order to break even. Since demand is generally not stable, the number of people willing to buy your product will change if you change your price.

• Too simple for complex businesses

The break-even point formula is quite simplistic. Many businesses have multiple products with multiple prices. It won’t be able to pick up all the variables. You’ll likely need to work with one product at a time or estimate an average price based on all the products you might sell. If this is the case, then it is best to run a few different scenarios to be better prepared.

• It doesn’t give account of competitors

As a new entrant to the market, you are going to have competitors on ground, and they of course would be wary of you. They could lower their prices, which can in turn affect demand for your product, causing you to change your prices too. This can equally affect your break even point.

The most common mistake entrepreneurs make when conducting break-even analysis is forgetting things, especially fixed and variable costs. Forgetting things would make your break-even calculation not to be accurate, and to correctly predict the viability of your business, your break even analysis should be as accurate as possible.

To make sure you don’t miss any costs, think through your entire operation from start to finish. If you think through packing a fragile product to ship it, you might remember that you need to add some protection to the box. If you are thinking through your festival setup, you might remember that you’ll need to provide drinking straws along with the drinks you will be servicing.

More on Business Plans

Break-even Point

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

Fact Checked

Why Trust Finance Strategists?

Table of Contents

Break-even point (bep) definition.

The break-even point is the volume of activity at which a company's total revenue equals the sum of all variable and fixed costs.

The activity can be expressed in units or in dollar sales. The break-even point is the point at which there is no profit or loss.

At the break-even point, the total cost and selling price are equal, and the firm neither gains nor losses .

The income of the business exactly equals its expenditure . This point is also known as the minimum point of production when total costs are recovered.

Break-Even Point: Explanation

It is possible to calculate the break-even point for an entire organization or for the specific projects, initiatives, or activities that an organization undertakes.

The basic objective of break-even point analysis is to ascertain the number of units of products that must be sold for the company to operate without loss. In other words, the no-profit-no-loss point is the break-even point.

Sales below the break-even point mean a loss, while any sales made above the break-even point lead to profits.

Formula For Break-Even Point

As you will be aware, profit can be calculated as sales revenues minus costs, where costs are either variable or fixed . That is to say,

Profit = Sales revenue - Variable costs - Fixed costs

where the sales revenue at break-even point = Fixed cost + Variable cost

This equation can be restated as follows:

Profit = (Unit sales price x Sales volume in units) - (Unit variable cost x Sales volume in units) - Fixed costs

M ethods to Calculate Break-Even Point

This section provides an overview of the methods that can be applied to calculate the break-even point.

1. Algebraic/Equation Method

The following equation is helpful when finding the break-even point using the algebraic method:

SP = VC + FC

• SP = Sales price
• VC = Variable costs
• FC = Fixed costs

With this in mind, the following equation can be used to find the break-even point (o):

o = SP - VC - FC

Using the algebraic method, we can also identify the break-even point in unit or dollar terms, as illustrated below.

Suppose that ABC Limited manufactures and sells a single product. The different costs per unit are as follows:

• SP per unit = $25
• VC per unit = $15
• Total FC = $30,000

Required: Calculate the break-even point in units and dollars using the algebraic method.

The following formula can be used to calculate the sold number of units at the break-even point:

SP x Y = VC x Y + FC

where Y is the number of units sold to break-even. It follows that:

25 x Y = 15 x Y + 30,000

25Y = 15Y + 30,000

25Y - 15Y = 30,000

10Y = 30,000

Y = 30,000/10

Y = 3,000 units

Now, as we have calculated the break-even point in unit terms, we can easily compute the break-even point in dollars. To do this, we use the following equation:

BE point in dollars = BE point in units x SP

= 3,000 x 25

2. Contribution Margin Method (or Unit Cost Basis)

It is also possible to compute the break-even point using the contribution margin method. Let's consider the same figures for ABC Limited used in our example on the algebraic method.

CM = SP - VC

CM = $25 - $15

Use the following formula to calculate the break-even point in sales units:

BE point = Fixed costs / CM per unit

= 30,000 / 10

= 3,000 units

Now, calculate the break-even point in dollars using the following formula:

BE point (dollars) = Fixed cost / CM (expressed as a percentage of sales revenue)

= 30,000 / 40% *

BE point (dollars) = $75,000

* C.M in percentage

3. Budget Total Basis

Break-even point = Total fixed cost X (Sales / Contribution margin)

If the same cost data are available as in the example on the algebraic method, then the contribution is the same (i.e., $16).

In addition, the break-even point would be 40,000 x (20/16) = 25,000 x 20 = $50,000.

4. Graphical Presentation Method (Break-Even Chart or CVP Graph)

The break-even point or cost-volume-profit relationship can also be examined using graphs.

Importance of Break-Even Point Analysis

Break-even point analysis can be applied to answer many important questions in business, including:

• What sales volume is required to produce the desired profits?
• What is the minimum level of sales needed to avoid losses?
• What effect will changes in fixed and variable costs have on profits?
• How will the change in sales mix in the context of a multiproduct firm affect profits?
• Which product is most profitable?
• What effect will a simultaneous change in price, cost, and volume have on profits?

Break-even Point FAQs

What is the break-even point.

The break-even point is the volume of activity at which a company’s total revenue equals the sum of all variable and fixed costs. The activity can be expressed in units or in dollar sales. The break-even point is the point at which there is no profit or loss.

What is the basic objective of break-even point analysis?

What is the formula for break-even point.

Profit = sales revenue – variable costs – fixed costs

What factors can affect the break-even point?

The break-even point can be affected by a number of factors, including changes in fixed and variable costs, price, and sales volume.

Can the break-even point be used to predict future profits?

No, the break-even point cannot be used to predict future profits. It is only useful for determining whether a company is making a profit or not at a given point in time.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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In Pursuit of Profit: Applications and Uses of a Break-Even Analysis

A break-even analysis is an essential element of financial planning. Here’s how to apply it to your business.

Table of Contents

Every entrepreneur should use a break-even analysis in their financial planning. It helps you understand your business’s revenue, expenses and cash flow so you can keep your doors open and your business profitable. 

Read on to learn more about a break-even analysis and how this essential form of financial planning helps business owners make informed decisions.

What is a break-even analysis?

A break-even analysis is a financial tool that helps determine when your company, service or product will be profitable. This calculation determines the number of products or services a company must sell to cover its expenses, especially fixed costs.

Here’s an example of the elements that go into a break-even analysis:

• Fixed costs: Fixed costs, also called overhead costs , are the expenses that stay the same no matter how much the business sells. They include utilities, bills, salaries and wages, rent and insurance.
• Variable costs: Variable costs are based on a business’s sales. They can include additional labor from independent contractors, materials and payment processing fees.
• Average price: This is the average amount you charge for your products and services.

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What is the break-even-point formula?

Taken together, these elements create a formula known as the break-even-point formula. This relatively simple calculation is essential for planning for profitability.

Fixed Costs / (Average Price – Variable Cost) = Break-Even Point 

The term “break-even” refers to a situation in which you are neither making nor losing money but all of your costs have been covered. With a break-even analysis, you can determine when your company will generate enough revenue to cover its expenses and earn a profit. The same holds true for a particular product or service. This data is often used for financial projections. 

Examples of break-even analysis

Here are two examples of the break-even-point formula.

The price of one of your products is $100. Your fixed costs are $10,000 per month, and the variable cost is $50 per product. The formula to calculate how many products you must sell to break even would look like this:

$10,000 / ($100 – $50) = 200

Based on the formula, you must sell 200 products to cover your costs, effectively breaking even. To be profitable, you would have to sell at least 201 products.

If a company has $20,000 in fixed costs and a gross margin of 35 percent, the business would need to make $57,143 to break even. 

$20,000 / 0.35 = $57,143

If revenue greater than $57,143 is achieved, the company can pay for its fixed and variable costs and make a profit.

Why is a break-even analysis important?

A break-even analysis informs you of the bare minimum performance your business must meet to avoid losing money. It also helps you understand at which point you’ll generate profits so you can set production goals accordingly. 

You can use this information when your business is in the planning stages to determine whether your idea is feasible. Then, once your business is established, you can use a break-even analysis to develop direct cost structures and to identify opportunities for promotions and discounts. 

Although there are many reasons to conduct a break-even analysis, let’s focus on the three most common uses.

It helps you identify the point of profitability.

A business that doesn’t turn a profit could take a turn for the worse at any time. This is why every company needs to focus on its point of profitability. Ask yourself these questions: 

• How much revenue do I need to generate to cover all of my expenses?
• Which products or services generate a profit?
• Which products or services are sold at a loss? 

A company’s goal is to become profitable as soon as possible. To ensure you’re on the right track, you need to focus on your numbers upfront. If you don’t calculate the break-even points for your products or services, you risk not generating a profit (or generating a smaller one than you expected).

It ensures that you price products and services correctly.

When most people think about pricing, they primarily consider how much their product costs to create, and they fail to take into account overhead costs. This leads businesses to underprice their products. Finding your break-even point will help you price your products correctly. You will know where to set your margins to generate the right revenue to break even and begin turning a profit. 

Determining your break-even point is simple if you offer only a couple of products or services. It becomes more challenging as your service offerings and production increase. 

Image via Business Tool Pro

As you determine your break-even point for a product or service, ask yourself the following questions: 

• What is the total cost?
• What are the fixed costs?
• What are the variable costs?
• What is the total variable cost?
• What are the costs of any raw materials?
• What is the cost of labor?

It gives you the information you need to implement the best strategy.

Using your break-even analysis, you can create a strategy for the future. Suppose your business’s profitability is determined by the success of one or more products. In that case, the break-even point for each product provides a timeline for the company, which can help you implement a better overall financial strategy that fits the projected costs and profits. 

This analysis can also help you determine ways to reach your company’s break-even point sooner, such as reducing your overall fixed costs, lowering the variable costs per unit, improving the sales mix by selling more of the products that have larger contribution margins, and increasing the prices (as long as it doesn’t cause the number of units sold to decline significantly). 

When should I use a break-even analysis? 

There are many situations where a break-even analysis comes in handy. According to Rick Vazza, owner of Driven Franchising, you should use a break-even analysis to answer the following questions about your business: 

• How much of my product or service do I need to sell per month?
• How much volume do I expect to sell?
• What price makes those figures match my break-even calculation?
• What price allows me to generate a reasonable profit? 

Your goal is to get an accurate look at your profit, net cash flow and finances. 

“It’s much easier for people to decide whether they can beat that minimum than guessing how many sales they may make,” said Rob Stephens, founder of CFO Perspective. 

Here are three times you should consider performing a break-even analysis. 

You are expanding your business.

Stephens suggested using a break-even analysis to assess how long it will take for any planned investments or changes in your business to become profitable. 

“These investments might be a new product or location,” Stephens said. “I’ve done break-even calculations many times for modeling the minimum sales needed to cover the costs of a new location.” 

You need to lower your pricing.

This analysis is also helpful when you’re lowering your prices to beat a competitor . “You can also use break-even analysis to determine how many more units you need to sell to offset a price decrease,” Stephens said. “The most common use of break-even analysis in my career has been modeling price changes.” 

You want to narrow down your options.

When making changes to your business, you may be bombarded with various scenarios and possibilities, which can be overwhelming when you’re trying to make a decision. Stephens suggested using a break-even analysis to narrow down your choices to scenarios with straightforward yes-or-no questions. For example, “Can we do better than the minimum needed for success?”

What are the limitations of a break-even analysis? 

Although a break-even analysis is a classic tool for predicting business sustainability, it does have some limitations. You should always use multiple tools when analyzing business processes and profitability.

It assumes market conditions are consistent.

Once you open your business, it will quickly become apparent that every day, month and year can be completely different. You might have an increased customer demand, multiple competitors or a change in consumer spending.

It’s not sufficient for long-term planning. 

A break-even analysis is most useful for short-term planning. For example, the analysis can accurately predict how many units must be sold for you to be profitable this month, but it cannot help you analyze business conditions over time, especially if you have busy and slow periods.

The analysis can quickly become obsolete.

Due to the short-term nature of a break-even analysis, it needs to be constantly updated to be accurate. If you fall behind on importing new data, the analysis can quickly become obsolete, leading to uninformed business decisions.

It’s not detailed enough.

If you have only one price point, a break-even analysis can be beneficial. However, most businesses have multiple price levels to encourage and engage a wide variety of consumers.

With multiple product tiers, your costs can fluctuate from supplies, inventory demand and shipping. With all of these factors to consider, you’ll need to use additional tools beyond a break-even analysis to accurately portray the financial health of your business.

It doesn’t account for competition.

Because there is no formula for a fluctuating marketplace, a break-even analysis can’t account for competition. You will need to monitor your competitors separately so you can accurately account for supply and demand, product price changes and promotional offers.

Julie Thompson and Julianna Lopez contributed to this article. Source interviews were conducted for a previous version of this article.

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• By Kathryn Shaw
• May 23, 2022

What is Break-Even Point (BEP)?

According to the Small Business Administration (SBA), 20% of small businesses fail in the first year, 50% after 5 years and only 33% make it up to 10 years and more, primarily based on their BEP performance.

During an enterprise’s earlier stages, founders understand the importance of a “break-even point”, with the crucial question, “When will I break even?”.

So what is a break-even point? The BEP aims to define the number of sales needed to cover costs, ensuring the company’s safety margin.

“On average, it takes 2 to 3 years for a company to reach its break-even point.”

Successful business leaders know that calculating their break-even point is crucial for any business plan, as it is effectively an enterprise’s “make or break” formula. Essentially, breaking even is a healthy sign of growth. For this reason, reducing business-specific risks whilst selling a product or service at a price that meets market levels is a company’s true foundation.

This article explains everything you need to know about BEP: what break-even means, the break-even formula, and how to use break-even analysis to secure your business’s future.

What is a break-even point (BEP)?

The break-even point plays a significant role in determining if your product or service is worth selling. When total cost and revenue are equal, there is no loss or gain in your business. This is determined through a break-even analysis.

If an enterprise has reached its break-even point, it is operating at neither a net loss nor net gain. Beyond this point, additional income contributes to extra profits for the business.

Once you have determined your BEP number, you can analyse your costs from rent, labour and materials and define your price structure through three fundamental questions: 

1 – Are your prices too low or your costs too high to reach your BEP?

2 – When will you foresee your break-even point?

3 – Does my business achieve sustainable results?

At this point, you will be able to determine whether your business model is in good form or whether you need to rethink your costs and/or your business model.

Don’t mistake accounting break-even points vs financial break-even points

There are a few differences between accounting and financial break-even points – let’s start by defining the two terms:

• The accounting break-even point is the easiest and standard way to analyse your profit. You can easily calculate the BEP by calculating the number of units that should be sold to cover your company’s total expenses (materials, production, salaries, rent).
• The financial break-even point is more complex as it measures the company’s earnings and not the product or number of units sold. Notably, a financial break-even point is the number of earnings before interest and taxes, resulting in zero net income or zero earnings per share.

Understanding breakeven points (BEPs) and their role in your success

Performing a break-even analysis is required in any business to set marketable prices. Through the BEP, you will establish clear sales targets whilst identifying weaknesses (i.e. sales and marketing strategy).

When understanding the work required to break even, a company can set significant revenue targets while perfecting its business strategy.

“The break-even theory is based on the fact that there is a minimum production level at which a venture neither make profit nor loss.” M. B. Ndaliman

4 Factors that increase a company’s break-even point

As you calculate a company’s breakeven point on variables, the BEP may increase or decrease depending on three main factors :

1 – Increase in production costs

It is probable that whilst customer demand remains the same, the price of variable costs increases – such as the price of raw materials, an increase in salaries, higher utility rates or a rent increase. Businesses are at the mercy of these price fluctuations, leading to a higher BEP.

2 – Increase in customer sales

An increase in customer demand leads to higher sales; the company has to produce more to meet the higher demand, thus raising the break-even point to cover additional costs.

3 – Equipment repair

Unfortunately, mishaps happen, and unpredictable breaks or malfunctions can occur. Repair costs need to be considered whilst the target numbers are not completed in the given time frame. In this case, equipment failures result in higher operating costs and a higher return on investment. 

4 – Break-even decrease

A company can successfully get to a break-even decrease when it increases its product contribution margin, which then decreases the product’s associated costs and expenses, thus expanding the amount of revenue each product generates. 

Next step: Understanding options trade breakeven points

To understand the full scope and importance of a break-even point, it is helpful to understand the areas in which it is of importance. 

In options trading, the break-even price is the price in the asset at which investors can choose to exercise or dispose of the contract without incurring a loss.

So, what is an option?

An option refers to a financial tool based on the value of underlying stakes such as stocks. An options contract allows the buyer to purchase or sell the asset depending on the type of contract. The holder does not have to buy or sell the investment if they decide against it.

How to calculate your break-even point?

A break-even point equation is ultimately a financial calculation used to determine the number of products or services you need to sell to cover your production costs.

There are two simple break-even formulas:

1) The number of units your business has sold

2) The points in sales dollars. 

• Break-Even Point in Units

For this equation, divide the fixed costs by the unit revenue minus the variable cost per unit.

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

• Break-Even Point In Sales Currency

Firstly determine your contribution margin: subtract the variable costs from the price of a product. 

Contribution Margin = Price of Product – Variable Costs

Then divide the fixed costs by the contribution margin:

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

In simpler words:

• Fixed costs: Costs that do not change (salary, rent, building machinery). 
• Sales price per unit or revenue: The selling price per unit. 
• Variable cost per unit: The variable costs sustained to create a unit (materials, labour).
• Break-even point: Once sales match your fixed and variable costs and your business reports net earnings of $0 – sales above that point contribute to your net profit.

Break-even point calculation example

Simply Business has fixed costs (lease, salaries, taxes) equal to $60,000. Their product is a gadget. Their variable costs to produce the gadget (raw material, factory labour, sales commissions) are $0.80 per unit. The gadget is sold at $2.00 each.

With this information and using the following break-even point equation, we can calculate the BEP for Simply Business’ gadget:

$60,000 ÷ ($2.00 – $0.80) = 50,000 units

What does this mean?

Simply Business has to produce and sell 50,000 gadgets to cover its total expenses (fixed and variable). With these sales, they will not make any profit but only break even.

How to reduce the break-even point

A company’s break-even point must be kept as low as possible to maintain the company’s profitability even when sales decline. There are four ways to do so:

Reduce fixed costs

The average company has several fixed costs, such as rent payments, employee salaries, and production equipment. By lowering these costs, the business needs fewer sales to cover the remaining fixed costs.

Reduce variable costs

You can raise the average contribution margin earned on each sale to decrease your BEP. This can be done by reducing variable costs by rethinking the products, standardising the product across platforms and allowing volume purchase discounts, or by increasing product quality, thus lessening guarantee repairs.

Raise product prices

Another way to reduce your company’s BEP is to set higher prices. This method only works if buyers are not particularly sensitive to price, i.e. when the business is established as a high-quality provider. This approach can be risky as your customers could go elsewhere if this strategy is not correctly implemented.

Go for outsourcing

Profitability may increase when a business chooses to outsource. This can result in lower manufacturing costs as production volume increases.

How to use break-even analysis in aim to decrease your BEP

As this article explains, one very effective way to reduce your risk is to conduct a break-even analysis. This BEP analysis will advise how to break even and regain your original investment. It is not only beneficial for a starting business but should be used for daily operations.

For starting a business

Starting your own business without a break-even analysis is a recipe for disaster. Calculating your BEP will help decide if your business plan is achievable whilst helping break down and examine company costs and give you clear visibility on your pricing strategy.

If your BEP shows that your current price is too low to break even within your desired timeframe, you should consider increasing the product’s cost. However, check the cost of comparable items as you don’t want your consumers to buy from competitors.

Choosing the suitable raw material is crucial, as you need both quality and sustainable costs. Thorough research and negotiation are key to the process.

New products 

Before launching a new product, consider both the new variable and fixed costs, such as design and promotion fees.

Setting longer-term goals is easier when you know exactly how much you need to make. For example, if you want to move to a larger warehouse, you can determine the amount you need to sell to cover your higher rent.

Knowing how many units you need to sell or how much money you need to make to break even can act as a strong motivational tool for you and your team.

In summary 

Ensuring your business has the right break-even point is crucial for any financial assessment, and the good news is that there is a simple mathematical equation to get there. 

Nonetheless, the break-even point should be calculated accurately and consider the overall company finances.

An enterprise can implement two simple steps to optimise its break-even point by 1) reducing fixed and variable costs, 2) raising product prices and/or outsourcing its raw materials. Consequently, these actions will depend on the circumstances of both the business and the market.

With this knowledge, a business can correct its approach to improving profitability whilst preparing the necessary steps to reach its business goals.

To find out how to simply your business accounting, learn more about SimplyPayMe ’s automated software.

Kathryn Shaw

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How to Calculate the Break-Even Point for Your New Business

As a small business owner, you are keenly aware of the importance of having a clear sense of financial positioning.

Understanding where you are financially helps you shape strategy, priorities, and operations.

One of the most essential financial calculations you should have at your fingertips is the break-even point. Based on your sales and expenses, the break-even point represents the moment when each additional sale generates a profit. As seen in the recent post,  Business Plan Calculators: The Quick Guide , there are excellent tools available to help you learn how to calculate the break-even point for your new business.

Using our step-by-step guide and one of the many small business plan calculators helps you  determine your break-even point .

Defining the Break-Even Point

Simply put, the break-even point is where total revenue is equal to total costs. It is the point a business has reached on a product or project where the sales volume has been sufficient to cover both fixed costs and variable costs. Your business is no longer spending more than it brings in, but it has not made any gains, either.

Knowing your break-even point helps you:

• Understand the number of units necessary to avoid losses.
• Forecast when the business first turns a profit.
• Gain a deeper understanding of fixed and variable costs and how to control them.
• Identify potential per-unit pricing changes.
• Assess the viability and risk of a new venture before launching. 

Before running a break-even point calculation, it is important to be clear on certain terms:

• Fixed costs:   These are expenses that are not affected by sales volume, such as rent, loan payments, marketing costs, and franchise fees. 
• Variable costs:   These costs are those that change with the number of sales made, such as materials and manufacturing expenses. 
• Contribution margin:   This is calculated by taking the selling price of a unit and subtracting the variable costs for that unit. For example, if your product sells for $500 and the costs of making the item are $300, your contribution margin is $200 per unit sold. You can use this margin to pay your fixed costs. Any money left over is your net profit. 
• Contribution margin ratio:   This is usually expressed as a percentage and is calculated by taking the contribution margin and subtracting revenue per unit.

To illustrate, consider a company that has the following figures:

• Fixed costs: $10,000 
• Variable costs per unit: $300 
• Selling price per unit: $500 
• Expected unit sales: 60

There are  two ways to calculate a break-even point  commonly used among businesses – using product units sold or sales dollars.  

To calculate the unit-based break-even point, use the following formula: 

Break-Even Point in Units = Fixed Costs ÷ (Selling Price Per Unit – Variable Costs Per Unit) 

Here is the calculation using our example figures: 

50 Units = $10,000 ÷ ($500-$300) 

If 60 units are sold, then the company would have a net profit of $2,000. 

The other method used is the revenue-based break-even point. It’s calculated by using this formula: 

Break-Even Point in Revenue = Fixed Costs ÷ Contribution Margin Ratio Contribution Margin = Price of Product – Variable Costs Contribution Margin Ratio = Contribution Margin (per unit) – Revenue (per unit) 

In our example, the contribution margin is $500 – $300 = $200. The contribution margin ratio is $200 ÷ $500 = 0.4 

The revenue break-even point is: 

$25,000 = $10,000 ÷ 0.4 

The company would need to generate $25,000 in sales to break even. 

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The Break-Even Point in business finance is a critical analysis point where total revenues precisely equal total expenses, resulting in no profit or loss.

Break-even serves as a fundamental financial benchmark, helping businesses determine the volume of sales needed to cover all operating costs. Calculating the break-even point involves assessing fixed and variable costs in relation to revenue, making it an essential tool for financial planning and decision-making. For startups and established businesses alike, understanding the break-even point is key to setting realistic sales targets, formulating pricing strategies, and evaluating the overall financial health of the venture.

To calculate the break-even point, divide the total fixed costs by the difference between the price per unit and the variable cost per unit. This formula yields the number of units that need to be sold to cover all operational costs.

Significance in Planning:

• The break-even analysis aids businesses in establishing sales objectives and pricing policies.
• It’s a crucial metric for investors and lenders to assess a business’s risk and sustainability.

Entrepreneurial Implications:

• For entrepreneurs, especially in startup scenarios, break-even analysis helps predict when the business will start generating profit and is crucial in demonstrating financial viability in business plans.
• The analysis is vital in guiding decisions related to cost management, pricing strategies, and allocating resources for marketing and sales.

Two Perspectives of Break-Even in Startups:

• Time-Based Break-Even : This refers to the point in time when cumulative revenues surpass cumulative expenses, including initial startup expenditures While fixed asset purchases are not included, the expenses include depreciation. It’s a milestone indicating when a startup recovers its initial investment.
• Profit-Based Break-Even : This is the point where a startup begins to generate a profit in a given period, marking a shift from just covering costs to actual financial gain.

Frequently Asked Questions

• How does understanding the break-even point benefit a startup in its early stages?

For a startup, understanding the break-even point is instrumental in financial planning. It informs entrepreneurs about how long it will take to recover initial investments and when the business will start being financially self-sustaining. This knowledge is critical for setting realistic goals, managing cash flow, and communicating the business’s potential to investors.

• Can the break-even point be used to make pricing decisions?

Yes, the break-even analysis can play a crucial role in setting product prices. By understanding the costs involved and the sales volume needed to cover those costs, businesses can more effectively determine pricing strategies that ensure profitability while remaining competitive in the market.

• How long does it take for a business to reach its break-even point?

The timeframe for reaching the break-even point varies significantly depending on several factors. These include the nature of the business, startup costs, fixed and variable expenses, pricing strategies, and the volume of sales. For some businesses, especially those with lower initial costs or high demand, the break-even point might be achieved relatively quickly. For others, particularly those requiring substantial upfront investment or in competitive markets, it might take longer. Ultimately, the specific business model, market conditions, and effective management of costs and revenues will dictate the time needed to reach the break-even point. Entrepreneurs should conduct thorough financial planning and market analysis to estimate this timeframe more accurately.

Related Terms

Also see: Fixed Costs , Operating Expenses , Working Capital , Net Profit

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