Calculating the break-even point for a business is important to determine its profitability.
If you are a small business owner or have just started your own business, doing a break-even analysis is important. It will help you determine if your business is sustainable or not, if the costs are too high or if the princess is too low to reach the break-even point at the right time. It will help you forecast your business’s profitability, revenue and growth.
What is the Break-Even Point?
A break-even point for a business refers to a stage where total revenue equals the total cost. At this point, your business is neither going through a loss nor a profit which means you are getting the same amount as you are spending on your business. For small businesses hitting the break-even point is the first step toward success and making the business profitable.
A break-even point formula is an important tool for your business. It will help you determine when your business will become profitable. You can then strategies your business plan accordingly to gain success. It will help you forecast your growth and profitability but also help you to promote your new product, cut down expenses, stay ahead of the competition, etc.
How to Calculate Break-Even Points?
There are two basic ways to calculate a business break-even point – one is based on the number of units of product sold, and the other is based on the points in sales dollars.
Break-Even Points Formula based on Units:
The Break-even point is calculated by dividing the fixed costs by the sales price per unit minus the variable cost per unit.
Break-Even Point (Units) = Fixed Costs ÷ (Sales Price per Unit – Variable Cost per Unit)
Fixed Costs: Fixed costs includes costs that do not change or change slightly and are not dependent on the number of products sold. Examples of fixed costs for a business are rent, utility expenses, production facilities, and service-based costs like advertising, PR, etc.
Sales Price per unit: It is the sales price of each product that the customer has to pay to buy the product.
Variable Costs per unit: Variable costs refer to costs that change frequently. These costs are directly linked to the product’s production and include costs for hiring labour or material used. Variable cost is calculated by dividing total variable costs by total units produced (Total Variable Costs ÷ Total Units Produced).
Let’s take an example to understand better the break-even point formula and how to calculate it.
Neil has a protein supplement company that wants to introduce a new flavour. Before launching this new flavour, he wants to determine how it will impact his company’s finances. That’s why he decided to calculate the break-even point to find out if it was worth the investment.
Fixed Costs = $2400
Variable Costs = .50 (per item produced)
Sales Price = $2
Break-even Point = $2400/($2 – $.50) = 1600
This means Neil has to sell 1600 items to reach the break-even point.
Break-Even Points Formula based on Sales Dollars:
It is calculated by dividing the fixed cost by the contribution margin.
Break-Even Point (Units) = Fixed Costs ÷ Contribution Margin
Contribution Margin: Contribution margin is the difference between an item’s variable cost and its selling cost.
Contribution Margin = Price of Product – Variable Costs
Taking the same example, we discussed above.
Fixed Costs = $2400
Contribution Margin = 1.25 -$0.5 = 0.75
Break-even Point = $2400/0.75 = $3200
This means Neil needs to generate revenue of $3200 by selling the protein supplements to reach the break-even point.
Apart from that, it also provides various other calculators like Salary and Income tax calculator, Depreciation Calculator, Forex calculator, Loan calculator, etc.
Nase – Break-even Analysis Calculator
This is another free calculator for calculating the break-even point. This calculator provides a graphical representation of break-even point analysis and provides a report based on your input.
Startupbonsai – Break-Even Calculator
This break-even calculator by Startupbonsai provides the total units and money needed to reach the break-even point.
For an Entrepreneur, a break-even point is a great tool to know if your business or new product will be worth the investment or not. The break-even analysis makes it simple and easy to strategies and plan your next steps to make your business profitable.
However, calculating it manually might be a cumbersome task, especially when you have too much on your plate already. You can use any of the above-mentioned break-even point calculators to help you calculate the break-even point.