Break-Even Point Calculator
What is Break Even Point?
Break-even (or break even), often abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss. Any number below the break-even point constitutes a loss while any number above it shows a profit. The term originates in finance but the concept has been applied in other fields.
In economics and business / organization, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or loss has not been made, although opportunity costs have been "paid" and capital has received the risk-adjusted, expected return. In other words, it is the point at which the total revenue of a business / organization exceeds its total costs, and the business / organization begins to create wealth instead of consuming it. It is shown graphically as the point where the total revenue and total cost curves meet. In the linear case the break-even point is equal to the fixed costs divided by the contribution margin per unit. The break-even point is achieved when the generated profits match the total costs accumulated until the date of profit generation.
Break-even point is one of the most commonly used concepts of financial analysis, and is not only limited to economic use, but can also be used by entrepreneurs, accountants, financial planners, managers and even marketers. Break-even points can be useful to all avenues of a business / organization, as it allows employees to identify required outputs and work towards meeting these.
The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero.
It is only possible for a firm to pass the break-even point if the dollar value of sales is higher than the variable cost per unit. This means that the selling price of the good must be higher than what the company paid for the good or its components for them to cover the initial price they paid (variable and fixed costs). Once they surpass the break-even price, the company can start making a profit.
For example, a business / organization that sells tables needs to make annual sales of 200 tables to break-even. At present the company is selling fewer than 200 tables and is therefore operating at a loss. As a business / organization, they must consider increasing the number of tables they sell annually in order to make enough money to pay fixed and variable costs.
The break-even value is not a generic value and will vary dependent on the individual business / organization. Some businesses / organizations may have a higher or lower break-even point. However, it is important that each business / organization develop a break-even point calculation, as this will enable them to see the number of units they need to sell to cover their variable costs. Each sale will also make a contribution to the payment of fixed costs as well.
If the business / organization do not think that they can sell the required number of units, they could consider the following options:
- Reduce the fixed costs. This could be done through a number or negotiations, such as reductions in rent payments, or through better management of bills or other costs.
- Reduce the variable costs, (which could be done by finding a new supplier that sells tables for less).
Either option can reduce the break-even point so the business / organization need not sell as many tables as before, and could still pay fixed costs.
The main purpose of break-even analysis is to determine the minimum output that must be exceeded for a business / organization to profit. It also is a rough indicator of the earnings impact of a marketing activity. A firm can analyze ideal output levels to be knowledgeable on the amount of sales and revenue that would meet and surpass the break-even point. If a business / organization don’t meet this level, it often becomes difficult to continue operation.
The break-even point is one of the simplest, yet least-used analytical tools. Identifying a break-even point helps provide a dynamic view of the relationships between sales, costs, and profits. For example, expressing break-even sales as a percentage of actual sales can help managers understand when to expect to break even (by linking the percent to when in the week or month this percent of sales might occur).
The break-even point is a special case of Target Income Sales, where Target Income is 0 (breaking even). This is very important for financial analysis. Any sales made past the breakeven point can be considered profit (after all initial costs have been paid)
Break-even analysis can also help businesses / organizations see where they could re-structure or cut costs for optimum results. This may help the business / organization become more effective and achieve higher returns. In many cases, if an entrepreneurial venture is seeking to get off of the ground and enter into a market it is advised that they formulate a break-even analysis to suggest to potential financial backers that the business / organization has the potential to be viable and at what points.
Break-even analysis can also provide data that can be useful to the marketing department of a business / organization as well, as it provides financial goals that the business / organization can pass on to marketers so they can try to increase sales.