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For Aleksi Halsas, understanding his company’s break-even point was a gamechanger that provided a valuable roadmap to success. The calculation, which pinpoints when a company is poised to turn a profit, gave Halsas the exact number of sales needed to cover costs.
“Determining our break-even point removed the guesswork and allowed us to move forward with clarity and set realistic sales targets and efficiently manage resources,” says the CEO of Clevenio, a sales engagement platform.
To determine your company’s break-even point, you can take into account all fixed and variable costs. You know you've reached a break-even point when revenue equals total expenses.
What Is the Break-Even Point?
The break-even point is when the cost of creating products or providing services equals the revenue for those products or services. At this point, the company is neither losing nor making money and is ready to begin generating a profit.
“Mastering break-even point analysis is crucial to building a sustainable and profitable business,” says Jake Munday, CEO and co-founder of sign design company Custom Neon.
“The break-even point calculation has been pivotal in guiding us through expansion phases and product launches and navigating challenging economic times like the pandemic – and even offering perks such as free shipping,” says Munday. “The process has ensured we remain grounded in financial realities while pursuing growth and innovation.”
How to Calculate Break-Even Point
The break-even point formula divides the total fixed costs required for production by selling price per unit, minus variable costs of each unit.
Break-even Point = Fixed Costs ÷ (Selling Price per Unit - Variable Cost per Unit)
- Fixed Costs: Expenses that don’t change based on volume of production or sales, including rent, equipment, utilities, salaries, and insurance
- Variable Costs: Costs that vary depending on sales volume and the level of production, including raw materials, labor, sales commissions, and shipping
- Variable Cost per Unit: Average variable cost per unit
- Selling Price per Unit: How much you sell your product for per unit
"Lowering variable costs or increasing the selling price can reduce the break-even point, making it easier to become profitable," Munday says. "However, increasing the selling price can also decrease volumes sold, so it's a continual balancing act.”
“Determining our break-even point removed the guesswork and allowed us to move forward with clarity and set realistic sales targets and efficiently manage resources.” —Aleksi Halsas, CEO, Clevenio
Keeping an eye on revenue and costs with a break-even point calculator can help effectively navigate your company’s growth.
Examples of the Break-Even Formula
Knowing the break-even point can be strategically beneficial to help ensure the profitability of sales or services. There are two main types of break-even formulas based on the type of business you run.
One formula determines the number of units you may need to sell to break even, while the other looks at the sales volume you may need to generate to break even.
Break-Even Point With Example for Units
To help determine your break-even point based on number of units sold, consider using this formula:
Fixed costs ÷ (Sales price per unit – Variable costs per unit)
For example, let’s say you run a plant nursery and your fixed costs, which include rent and utilities, are $8,000 per month. Each plant sells for an average of $25. Your variable costs include plants, fertilizer, pottery, and potting soil and total $8 per plant.
Your break-even point would be $8,000 ÷ ($25-$8) = 470.6 plants sold per month
Break-Even Point With Example for Revenue
If you sell services rather than products, you may want to determine your break-even point in sales revenue. To do this, you can first calculate your contribution margin.
Contribution margin = (Sales price per service – variable costs) ÷ sales price per service.
Once this is calculated, you divide your total fixed costs by the contribution margin.
Using the nursery example, here's how you would calculate.
Contribution margin - $25-$8 = $17 ÷ $25 = .68 contribution margin
Total fixed costs ($8,000) ÷ contribution margin (.68) = $11,765 to break even
While the break-even formula can be essential for guiding your business and determining when you're making a profit, it can also be useful for calculating other points of significance, such as large expenses like mortgage and equipment.
It may be helpful to make a graph to better visualize your break-even point.
How to Use the Break-Even Point to Help Benefit Your Business
Calculating the break-even point can help small businesses work toward increasing profitability.
Here are some possible benefits from determining your break-even point, according to Joan Denizot, owner of Zize Bikes, and Mia Anderson, founder of ChicSew.
- Successfully introduce new products: Calculating the break-even point can be an effective tool for helping the viability of new products, Denizot notes.
- Effective pricing: Knowing the break-even point helps Denizot create "competitive yet profitable prices,” she says. “For instance, if our break-even point is 500 units and we aim to sell 700 units, we can adjust our pricing to ensure profitability.”
- Cost management: “Identifying fixed and variable costs enables us to manage our finances efficiently,” says Denizot. “If we find variable costs are higher than anticipated, we can explore cost-cutting measures to improve our break-even point.”
- Profit planning: The break-even point helps Denizot determine the sales volume required to achieve desired profit margins. “For example, if we want a 20% profit margin, the break-even analysis will show us the corresponding sales volume needed,” she says.
- Scaling operations: “By identifying the sales volume required to cover the additional costs, we can determine if our company can afford a market or product,” says Anderson.
- Supply chain optimization: “Evaluating variable costs aids in negotiating favorable deals with suppliers and can lead to cost savings in materials," she says.
Additionally, if your company needs to adapt to trends by offering discounts or promotions, evaluating your variable and fixed costs can be helpful. You can be guided to a break-even point that allows you to stay competitive.
While the break-even point can give you a clear point at which your company will become profitable, it can be a moving target as factors continually change. Break-even analysis, on the other hand, can help bring a nuanced, broader perspective of your company’s financial viability. As a result, a break-even analysis could help positively impact many areas of your business.
“Break-even analysis allows my company to simulate various scenarios like changes in material costs or shifts in consumer preferences,” says Tanya Zhang, co-founder and CEO of Nimble Made, a men's shirt company. “The process is a fundamental part of our strategy, driving our decisions and helping us navigate the challenges of the fashion industry with confidence and clarity."
The Takeaway
While discovering your break-even point is a good place to start, using break-even analysis could help make all the difference in ensuring your company goes the distance.
Photo: Getty Images
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