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Business Analysis Metrics: Break-Even to Profitability

Ever wonder how much cash you need to cover costs? Without knowing your break-even point, it’s like basketball - shooting a ball into the basket blind. The business’s break-even point helps comprehend what critical key financial metrics’ goals are. Analyzing break-even is critical for knowing how much it takes to keep your business financially actively moving forward. The break-even point is the sales volume where neither profit nor loss is made. From there, you can take various actions and strategize to improve your profitability, and learn how to manage the cash flow.

Break-Even Analysis

Business owners may also understand it as the break-even point is the sales volume where the contribution margin amount equals the fixed cost amount.

Here’s a break-even graph that helps clearly show where the break-even point is and how much more you need in order to start making a profit. On the horizontal axis is the number of units sold and on the vertical axis is the total dollars. The contribution margin (or the total dollars) goes up for every unit sold. Contribution margin is revenue minus variable cost, what you sell the product for minus what it costs you to make an incremental unit. Fixed costs don’t vary with the number of units sold. Typical examples of fixed costs are salary, rent, depreciation, and research and development expenditures. The break-even point is right here, where the two lines intersect.

If the business sells fewer than below the break-even (the dotted purple line), then the contribution margin is lower than fixed costs, it will land in the negative (orange area) and the business is losing not profiting. If the business sells more than the break-even (the purple dotted line), then the contribution margin is higher than the fixed costs, it’ll land within the positive (green area) and congratulations - the business makes a profit!

Here are a few uses once the break-even is figured out:

  • Analyzing expenses

  • Setting prices

  • Launching new products and services

  • Deciding whether to stay in business

Break-Even Formula

If you have not downloaded our Break-Even to Profitability template, click here to get it free today!

If you are not using our free tools, use the following formula to calculate the break-even point in units:

Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

or in sales dollars using the formula:

Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

Here’s a step by step video on how to calculate the break-even point:

Having a profitable business should be the top goal of a business owner. So it is imperative that you understand your break-even point, as this financial metric is the defining calculation when it comes to understanding profits and losses. If you’re not covering your expenses, it doesn’t matter how much revenue you’re bringing in; you’re still losing money. Reaching break-even where your revenue matches your operating expenses and cost of goods sold is a great first step towards striving for a profitable business. Now that you understand break-even, let's look at a couple of easy steps on how to increase your revenue and decrease your expenses.

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