# What is the Break-Even Point? Definition, Formula, and Examples

Dividing the fixed costs by the contribution margin will provide how many units are needed to break even. Once you’ve calculated the numbers above, it’s easy to figure out your break-even point. The formula for determining your breakeven point requires no more than simple arithmetic. Simply divide your estimated annual fixed costs by your gross profit percentage to determine the amount of sales revenue you’ll need to bring in just to break even. A breakeven point is used in multiple areas of business and finance. In accounting terms, it refers to the production level at which total production revenue equals total production costs.

If you have fixed costs that do not incur monthly you should still include them, but calculate the monthly amount that goes towards that expense. For example, if something is paid for on a quarterly basis, but does not change with production you would divide that cost by four in order to estimate the monthly amount of that cost. In the break-even analysis, we will help you break down the potential fixed costs related to your business. The break-even point is the moment when a company’s product sales are equal to its overall costs. In other words, it’s where total expenses and total revenue balance out. Homeowners, investors, and stockbrokers all understand the line where financial investment meets financial return.

## Master the Break Even Analysis: The Ultimate 2023 Guide

If that’s the case, take heart in the fact that you found out before you invested your (or someone else’s) money in the idea. Use your break-even point to determine how much you need to sell to cover costs or make a profit. And, monitor your break-even point to help set budgets, control costs, and decide a pricing strategy. This applies equally to adding new online sales channels, like shoppable posts on Instagram. Will you be planning any additional costs to promote the channel, like Instagram ads? Fixed costs are any costs that stay the same, regardless of how much product you sell.

In terms of its cost structure, the company has fixed costs (i.e., constant regardless of production volume) that amounts to \$50k per year. Recall, fixed costs are independent of the sales volume for the given period, and include costs such as the monthly rent, the base employee salaries, and insurance. Any time you add a new sales channel, your costs will change—even if your prices don’t. For example, if you’ve been selling online and you’re thinking about doing a pop-up shop, you’ll want to make sure you at least break even. Otherwise, the financial strain could put the rest of your business at risk. Break-even analysis is a small-business accounting process for determining at what point a company, or a new product or service, will be profitable.

## The Importance of Cash Flow Management for Small Businesses

Breakeven analysis is a tool used to determine when a business will be able to cover all its expenses and begin to make a profit. Yes, you would want to use the average cost per unit along with the average selling price to get the contribution margin per unit in the formula. 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. Fixed costs are expenses that remain the same, regardless of how many sales you make. These are the expenses you pay to run your business, such as rent and insurance.

In investing, the breakeven point is the point at which the original cost equals the market price. Meanwhile, the breakeven point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss. By dividing the fixed costs by the total profit on each unit sold, you can determine how many units you need to sell before your company can sustainably pay off its expenses. This is helpful because it shows the minimum amount of units your company would need to sell before breaking even.

## What can you do to improve your company’s break-even point?

This means that you’re bringing in the same amount of money you need to cover all of your expenses and run your business. Lowering your variable costs is often the most difficult option, especially if you’re just going into business. But the more you scale, the easier it will be to reduce variable costs. It’s worth trying to lower your costs by negotiating with your suppliers, changing suppliers, or changing your process.

• There are a few ways to calculate your BEP, but if you have a strong CRM like Zendesk Sell, it can calculate the values for you.
• Instead, if you lower your price and sell more, your variable costs might decrease because you have more buying power or are able to work more efficiently.
• Instead of dividing the fixed costs by the profit gained from each sale, it uses the percentage of how much value you’re getting from each unit.
• More than that, if the analysis looks good, you will be more comfortable taking on the burden of financing.

If you’re using the break-even analysis spreadsheet, it will do the math for you automatically. If you’re a business owner, or thinking about becoming one, you should know how to do a break-even analysis. It’s a crucial activity for making important business decisions and financial planning.