![]() Advantages of the break-even analysisįirst, let’s dig into the good stuff - much of which we’ve touched on already. Let’s take a closer look at what we mean here. Pros and cons of using the break-even analysis methodĭone correctly, conducting break-even analyses can lead to great things for your business.īut, it can also lead you in the complete wrong direction if you aren’t careful. That said, it’s still important to understand your break-even point from both angles, as this will help you determine the best course of action moving forward. (Since you can’t sell a fraction of a unit, we round up when calculating the quantity-based break-even point.) In other words, you’d need to sell 435 units every quarter to achieve profitability.Īs you may have noticed, both of these numbers are closely related: Your revenue-based break-even point is roughly the same as your unit sales target multiplied by your profit per sale. You also want to know how many actual units you’ll need to sell to hit your break-even point.īreak-Even Point = (Fixed Costs) / (Revenue Per Unit - Variable Costs Per Unit)īreak-Even Point = ($10,000) / ($25 - $2) So, you’d have to generate $10,869.57 in revenues to break even every quarter. This is found using the following formula:Ĭontribution Margin = (Sales Price Per Unit - Variable Costs Per Unit) / (Sales Price Per Unit)īreak-Even Point = (Fixed Costs) / (Contribution Margin)īreak-Even Point = ($10,000) / To calculate your break-even point in this way, you’ll first need to calculate your contribution margin. Here, you’ll be finding the total amount of sales revenue you’ll have to generate for your business to be profitable. Your fixed costs are $10,000 per quarter. Each widget sells for $25, and costs $2 to make. You own a small shop that specialises in selling a unique widget. Here, we’ll use each method to calculate the break-even point(s) for the following scenario: When conducting a break-even analysis, you can use either sales revenue or sales quantity as a point of reference. The overall goal of a break-even analysis is to identify how much you need to make to cover these costs, and ultimately to turn a profit. A few examples: material costs, hourly/overtime pay, and shipping fees. Variable costs are those that fluctuate regularly, and/or with business operations. = Fixed Costs / (Average Price - Variable Costs)įixed costs refer to standard, unchanging expenses, like rent, salaries, and insurance payments. Your break-even point is calculated using the following formula: ![]() Keep all this in mind, as we’ll revisit it when discussing the advantages and drawbacks of conducting break-even analyses. In conducting this analysis, you’ll be able to identify and diagnose potential risks within your plan - and can start focusing on making the necessary improvements right away. If your break-even point is too far out into the future, or is unattainable in terms of sales numbers and revenues, you might need to think twice about making the investment.Ī break-even analysis is also important for strategic planning. Why are break-even analyses important?īreak-even analyses serve 2 key purposes.įirst, it enables you to assess the validity and viability of a potential business investment (or, again, your business as a whole). As such, it’s a vital tool to help small businesses make the most of their efforts and stay on the fast-track to growth. Once this point is met, any additional revenue generated from the venture is considered profit.īreak-even analyses can be applied to individual business ventures - such as a new product or service - or to your business as a whole. The break-even point of a business venture is met when the revenues generated by the initiative equal the amount invested into it. Put more succinctly, the break-even analysis is used to find your break-even point. What is a break-even analysis?Ī break-even analysis is an accounting process that determines the point at which a business investment will be on the verge of becoming profitable. ![]() How to reduce your break-even point and reduce the time it takes to achieve profitability. The advantages and limitations of break-even analyses ![]() How to conduct a break-even analysis (in multiple ways) ![]() This is where break-even analysis comes in. Achieving profitability is a major milestone for any small business owner.īut, before you can focus on turning a profit, you need to focus on balancing out your revenues and your expenses. ![]()
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