What is break-even analysis? How to calculate the break-even point and gain financial insights

Running a small business can be a costly endeavour, and with cost always comes risk. As a small business owner, you might find challenges in measuring whether the risks and associated expenses are worth it. Is your small business profitable? If not now, will it ever be? How do you get there?

If you find yourself asking these questions, it’s time to dive deeper into your break-even point. This is an invaluable accounting concept that can help small business owners determine the point at which their business breaks even and what steps they might take to make it become profitable. 

Read on to learn all about how this accounting formula can serve your small business.

• What is the break-even point?
• What is a break-even analysis used for?
• How to calculate the break-even point
• Break-even point analysis examples

How to calculate the break-even point in sales dollars

Calculating the break-even point in sales dollars will tell you how much revenue you need to generate before your business breaks even.

The break-even analysis template for calculating the break-even point in sales dollars is as follows:

Break-even point (sales dollars) = fixed costs / contribution margin

The contribution margin is the profit of a single product or service. To find the contribution margin ratio, use the following formula:

Contribution margin = (sales price per unit - total variable costs per unit) / sales price per unit

Calculate break-even point in number of units

If you’d prefer to calculate how many units you need to sell before breaking even, you can use the number of units in your calculation. That formula is as follows:

Break-even point (units) = fixed costs / (sales price per unit - total variable costs per unit)

Break-even point analysis examples

Break-even analysis is an essential financial analysis for all businesses, from startups to established businesses looking to roll out a new product or increase total revenue. Let’s look at some examples of the break-even point in use.

Using break-even point to determine level of production

Let's say you’re trying to determine how many units of your widget you need to produce and sell to break even. Again, here’s what we know about your business:

• Fixed cost of running your business: $20,000 per quarter
• Unit variable cost: $10
• Proposed unit price per unit sold: $30

To determine our break-even point in units, we’ll calculate the following:

Break-even point (units) = $20,000 / ($30 - $10)

According to the above formula, you’ll need to generate and sell 1,000 units to break even. Any more than that will generate profit. How does that compare to your total sales forecast? If the units sold to break even is greater than your forecasted sales volume, you may want to:

• Increase your level of sales
• Increase your unit production by increasing direct labour.

Performing a break-even analysis can give you insight into many different elements of your business. It can help you understand the following:

• Is a product’s price realistic? If you won’t be able to reach the break-even point based on your current price, you may want to increase it.
• Are your labour costs too high? If your product is so expensive to make that your contribution margin simply isn’t working out, you may need to bring down labour costs.
• Is a product worth bringing to market? If the demand for your product is smaller than the number of units you’ll need to sell to break even, it may not be worth bringing the product to market at all.

As a small business owner, there are so many risks that you take each day. The best way to protect yourself and your business is by limiting your risk. Break-even analysis is an important way to help calculate the risks involved in your endeavour and determine whether they’re worthwhile before you invest in the process.

If you’re looking for other small business tips and financial reporting tools, we’re here to help. QuickBooks can assist with all small business accounting needs, from bookkeeping and reporting to managing invoices. Contact us today to discover what QuickBooks can do to help you and your small business.