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Break-even analysis

Break-even analysis helps predict when your business will start making profits. It's essential for evaluating start-up ideas, assessing new costs, and projecting profitability for new products. Begin by identifying your costs, separating them into fixed and variable categories. Calculate your total fixed costs and variable cost per unit. Utilize the break-even equation to determine sales volume required to break even, including various scenarios such as hourly rates and advertising spend. This analysis is crucial for informed decision-making and financial planning.

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Break-even analysis

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  1. Break-even analysis

  2. Break-even analysis predicts when… … Your business is going to start making profit.

  3. Evaluate a start-up idea • Assess the impact of new costs • Project profitability for a new product It can also be used to:

  4. Start with your costs… • …By separating them into fixed costs (overheads) and variable costs • You need to know your: • TOTAL FIXED COSTS • VARIABLE COST PER UNIT It can also be used to:

  5. The break-even equation: Total fixed costs Sales volume required to break even = Contribution margin

  6. Dollar break-even equation: The same as before, just express the contribution margin as a % converted into a decimal figure 62.5% = 0.625

  7. Hours worked break-even equation: Total fixed costs Hourly charge out rate = Hours to break even

  8. Advertising spend break-even equation: Advertising spend Contribution margin = Sales volume required to break even

  9. Weighted average price… …Is used to find a break-even point by companies selling multiple products or services

  10. Weighted break-even equation: Total fixed costs (weighted average price – weighted average variable costs) = Sales volume required to break even

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