Small Business
Break-even Analysis: How To Calculate a Break-even Point
We explain how you can find out if your business is breaking even

One of the main goals of many small business owners is to eventually turn a profit. While you may have grand dreams for your business, it’s important to be aware of what it will take to first break-even. Find out what a break-even point is and how you can find yours.


What is the break-even point in business?

In business, the break-even point is the stage at which a business’ revenue starts to equal the total expenses involved in its operation. At this stage, the business is not making a profit or a loss but is simply ‘breaking even’. Calculating your business’ break-even point can be useful in determining when you might expect to make a profit and if your operations are sustainable.
 

What is a break-even analysis?

Break-even analysis is a process that can help business owners discover the point at which their business is expected to break-even. It involves the analysis of a business’ fixed and variable costs, as well as any product sale prices, providing the information needed to help determine when your expenses and profit will become equal. Taking the time to conduct a break-even analysis can have many benefits for your business, including:

 
  • Better understanding how profitable your products or services currently are
  • Discovering how many units need to be sold before you can make a profit
  • Being aware of how changes in fixed and variable costs, product pricing and sales volumes may affect your ability to make a profit
  • Prompting you to explore how cutting costs may affect your bottom line
  •  Assisting you in setting clear business objectives
  • Reducing potential risk before launching a new product or diversifying your business
 
 

How to calculate the break-even point

 

Before you calculate your break-even point, there are a few key figures you’ll need to have on hand. These include your business’ fixed costs and variable costs, and your sale price per unit. Fixed costs are the regular costs that your business pays each month. They remain largely the same from month to month and can include expenses such as rent, electricity, insurance, and wages. These expenses are generally not dependent on how many products you sell or the number of services you provide.
 

Variable costs are typically classified as the costs involved in making, selling, or providing your product or service. These expenses may be subject to change over time and can include the cost of materials, packaging, postage and more.
Your sale price per unit is simply the price at which you sell each product or service.
 

Using these figures, you can perform a unit-based break-even analysis. To do so, you’ll divide your business’ total fixed costs by the sale price per unit minus any variable costs per unit. If your business sells a variety of products or services, you may need to repeat the process for each product line.

If you’d prefer to determine a dollar break-even figure, you’ll divide your business’ fixed costs by the sale price of your products minus any variable costs divided by the sale price of your products.

 

 

The break-even point formula

If you’re looking to conduct a unit-based break-even analysis, the break-even formula you’ll use is as follows: break1-(1).png

For example, if your fixed costs are $2,000, your sale price per unit is $20 and your variable costs per unit are $10, the formula would look like this: break-2-(1).png

 

For a break-even analysis that will provide a dollar break-even figure, the formula is largely the same but, instead of focusing on per-unit costs, you’ll focus on total costs. The break-even formula is as follows: break-3-(1).png

For example, if your fixed costs are $2,000, your sale price per unit is $20 and your variable costs per unit are $10, the formula would look like this:

break-4-(1).png

 
 

Break-even point calculators

 

If math isn’t your strong suit or you’d simply like to make working out your business’ break-even point simpler, there are plenty of break-even point calculators hosted across the internet. Some websites hosting interactive online break-even calculators include:

Looking for more tips and tricks to guide you on your small business journey? Stop by our small business blog for more great information.

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Aon has taken care in the production of this document and the information contained in it has been obtained from sources that Aon believes to be reliable. Aon does not make any representation as to the accuracy of the information received from third parties and is unable to accept liability for any loss incurred by anyone who relies on it. The recipient of this document is responsible for their use of it.