Where a company like LendingTree might help you compare loan offers, AOF will actually extend a fair loan and then help you use that capital effectively through sound business practices. Where a lender like Funding Circle might fund you and expect you to figure out the rest, AOF sticks with you on the journey – through break-even and onward to profitability and growth. By being aware of these common mistakes, you can use break-even analysis more effectively.

Break-even point analysis alternatives

The break-even point (BEP) is when your total revenue equals your total costs. At this point, you’re not making a profit, but you’re not losing money either. One of the most important concepts here is the margin of safety. That’s the difference between the number of units required to meet a profit goal and the required units that must be sold to cover the expenses.

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In practical terms, if your company’s break-even point is $50,000 in monthly sales, then at $50,000 you have paid all your bills and costs for the month, but you haven’t made a dime of profit yet. Every dollar beyond that is profit; every dollar below means a loss. The break-even volume of sales is USD 100,000 (5,000 units at USD 20 per unit). At this level of sales, fixed costs plus variable costs equal sales revenue. By understanding your fixed and variable costs, setting your selling price 2 2 perpetual v. periodic inventory systems financial and managerial accounting strategically, and calculating your break-even point, you gain valuable insights into your business’s financial health. From there, you can make confident decisions that maximize profits.

For one, achieving break-even is a major milestone for a new business – it signals you’ve built enough revenue to cover ongoing costs​. But beyond that, break-even analysis is a fundamental piece of financial planning for businesses of all sizes. Knowing your break-even point helps you anticipate when your cash flow will turn positive, so you can plan for the cash you’ll need to get there. The break-even point (BEP) is the moment your business’s total revenue exactly covers its total costs. At break-even, you’re not losing money, but you’re not making a profit either – it’s the threshold where your business “breaks even” on expenses​.

Simple calculation of break-even quantity

A plan that requires capturing 5% of a market might seem doable, but if that market is crowded and competitive, it might be harder than you think. Consider seasonality, local demand, economic downturns, and how much traffic your location gets. Always cross-check your break-even projections with what’s realistically possible given external conditions. Use real-world data like foot traffic, online engagement, or competitor performance to validate your assumptions. Ideally, as your business grows, your break-even should stay manageable — or even improve — because you’re optimizing costs and increasing margins.

• For a company such as General Motors that makes not only automobiles but also small components sold to other manufacturers and industries, it makes no sense to think of a break-even point in units.
• That $20 from each sale goes toward paying down your fixed expenses.
• Calculating the break-even point helps you determine how much you will have to sell before you can make profit.

It is critical to know how expenses will change as sales increase or decrease. Some expenses will increase as sales increase, whereas some expenses will not change as sales increase or decrease. Barbara is the managerial accountant in charge of a large furniture factory’s production lines and supply chains. This will give us the total dollar amount in sales that will we need to achieve in order to have zero loss and zero profit.

Break-even point in dollars

However, when Video Productions has an output of 10,000 units, the company has net income of USD 40,000. To illustrate the calculation of a break-even point in units, Video Productions produces videotapes selling for USD 20 per unit. Fixed costs per period total USD 40,000, while the variable cost is USD 12 per unit. A company may express a break-even point in dollars of sales revenue or number of units produced or sold. No matter how a company expresses its break-even point, it is still the point of zero income or loss. A company breaks even for a given period when sales revenue and costs incurred during that period are equal.

Launching a New Product or Service

Business owners and managers use the results from break-even analysis to determine the potential profitability of a product line or service. Using the details obtained from the report, business owners can evaluate the feasibility of the organization to generate a return through product sales. In our first example, the contribution margin of your product is $40, in other words, $100 minus $60. The $40 contribution margin covers your remaining fixed costs, since these fixed costs aren’t included when calculating this contribution margin. Contribution margin is the amount remaining after all variable expenses are subtracted from revenues. It indicates the amount available from sales to cover the fixed expenses and profit.

Interpretation of Break-Even Analysis

If you’re looking to learn how to calculate your break-even point, you can use one of the two formulas below. If you’re planning to increase what you charge for your products, be prepared for an adverse reaction from customers and even the loss of sales in these challenging economic circumstances. Carrying out an analysis can help you to find the best price for your products or services in terms of your profitability. It can help you to make projections and manage cash flow if you’re launching a new product or making changes to an existing one.

The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even analysis to measure its repayment of debt or how long that repayment will take. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product. Note that the revenue and total cost lines cross at 5,000 units—the break-even point. Video Productions has net income at volumes greater than 5,000, but it has losses average payment period at volumes less than 5,000 units.

Some expenses look variable but aren’t — like a monthly phone bill that only changes if you go over the limit. For semi-variable costs (like utilities), split them into fixed and variable portions. And don’t forget to include your own salary as a fixed cost if you want to account for paying yourself. Some business owners leave it out to see if the operation breaks even on its own, but long term, the business should be able to afford the owner’s paycheck too.

The goal is to have accurate, honest inputs and to revisit the analysis as a living part of your business toolkit. By playing with different scenarios and analyzing the results, you can find that sweet spot — the price that attracts customers while ensuring the advantages of amortized cost you make a healthy profit. While the break-even point formula provides a clear calculation, understanding when you’ll actually hit that point is equally important. A break-even analysis is the calculation that helps you determine your break-even point.

For instance, if management decided to increase the sales price of the couches in our example by $50, it would have a drastic impact on the number of units required to sell before profitability. They can also change the variable costs for each unit by adding more automation to the production process. Lower variable costs equate to greater profits per unit and reduce the total number that must be produced. Before making a big move, use break-even analysis to run the math. If you’re adding new equipment, you’ll likely increase fixed costs — say, a monthly lease or maintenance fee.

• The formula for calculating the break-even point (BEP) involves taking the total fixed costs and dividing the amount by the contribution margin per unit.
• She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
• In a period of complete idleness (no units produced), Video Productions would lose USD 40,000 (the amount of fixed costs).
• Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling.

It’s also important to keep in mind that all of these models reflect non-cash expense like depreciation. A more advanced break-even analysis calculator would subtract out non-cash expenses from the fixed costs to compute the break-even point cash flow level. Let’s say that we have a company that sells products priced at $20.00 per unit, so revenue will be equal to the number of units sold multiplied by the $20.00 price tag. Every business faces a critical threshold in its operations—the point at which sales revenue precisely covers all expenses. This pivotal moment, known as the break-even point, separates a time of financial losses from profitability.

In conclusion, break-even analysis is a quantitative tool that is used by businesses in order to determine what minimum sales volume is required to cover all the costs incurred and reach break-even. It is also helpful in making pricing strategies and managing operations. Businesses can also do what-if analysis for different scenarios by using breakeven equation. For example, what will happen if price, fixed cost or average variable cost is changed?