For instance, you can calculate a monthly, weekly, or even daily break-even analysis to give your sales team a goal to aim for.ĭo you need help completing your break-even analysis? Connect with a SCORE mentor online or in your community today. For instance, if you add another employee to the payroll, how many extra sales dollars will be needed to recoup that additional expense? If you borrow money, how much will be needed to cover the monthly principal and interest payments?Ī break-even analysis can also be used as a motivational tool. In this situation, a break-even analysis can help you calculate how different scenarios might play out financially. Existing businesses can benefit from a break-even analysis, too. If your break-even analysis shows that it will take longer, you need to revisit your costs and pricing strategy so you can increase your margins and break even in a reasonable amount of time. In general, you should aim to break even in six to 18 months after launching your business. This will help you plan the amount of startup capital you’ll need and determine how long that capital will need to last. ![]() Financing sources will want to see when you expect to break even so they know when your business will become profitable.īut even if you’re not seeking outside financing, you should know when your business is going to break even. It's comprised of costs and revenue: fixedcosts (perunitrevenue - perunit. Let's go you through the whole process: The general equation is fixedcosts perunitprofit numberofunits. When Should You Use a Break-Even Analysis?Ī break-even analysis is a critical part of the financial projections in the business plan for a new business. The manual break-even analysis is super easy once you realize that you simply need to balance fixed costs with gross profit. To use this break-even analysis template, gather information about your business’s fixed and variable costs, as well as your 12-month sales forecast. Your business is “breaking even”-not making a profit but not losing money, either.Īfter the break-even point, any additional sales will generate profits. At sales levels below this level (S3), the amount by which the cost line is above the revenue line is loss.What is a break-even analysis? The break-even point is the point when your business’s total revenues equal its total expenses. At sales levels above this level (S2), the amount by which the revenue line is above the cost line is profit. The level of sales where the two lines cross (S1) is the breakeven level of sales. The level of cost over this amount is the variable cost at various levels of sales. The cost at zero sales represents the fixed cost. The total cost line shows the total cost at each level of sales. The revenue line shows the total revenue at each level of sales. Revenue and costs are on the vertical axis. The level of sales is on the horizontal axis. As shown below, because we were computing breakeven price, the return over all costs is zero.Ī graphic representation is shown in Figure 1. Next compute the return over variable costs.įinally compute the return over all costs. To prove that the procedure is correct, go through the steps below. However, at higher prices, the product will be more difficult to sell. Notice that the higher the price, the smaller the quantity you will need to sell to break even. Next, divide total fixed cost by each contribution margin to compute the breakeven sales quantity. Select a range of sale prices and compute the contribution margin for each price. ![]() The example below helps explain the concept. The breakeven level is the number of units required to be produced and sold to generate enough contributions margin to cover fixed costs. It is the amount of money that the sale of each unit will contribute to covering total fixed costs. Contributions Margin is the “selling price less the variable costs per unit”, the denominator in the equation above. This can be computed under a range of sale prices with the formula below.Ī key concept of this formula is the Contributions Margin. One approach is to pick a sale price or a series of sale prices and compute how much of the product you will need to sell at each price to break even.īreakeven sales volume is the amount of your product that you will need to produce and sell to cover total costs of production. To do this you need to classify the costs into the managerial cost categories of variable and fixed costs. Because fixed costs need to be covered regardless of the number of units produced and sold, the number of units you produce and sell determines the price needed to break even. However, there is not a specific price level that you can charge that will assure you that you will cover your costs. Product price can be based on the cost of producing the product.
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