It can take time for your small business to turn a profit. When you near that stage, it’s critical to know your break-even sales volume. It’s a benchmark performance metric for every small business because it establishes the target needed to cover costs and make a profit.
What Is a Break-Even Analysis?
A break-even analysis results in neither a profit nor a loss. Instead, it determines the number of sales needed to cover all variable and fixed costs. It calculates the minimum number of units to sell and the sales volume needed to pay all expenses before making a profit.
What Is the Break-Even Analysis Formula?
The formula for break-even analysis is:
- Break-even volume in units = Fixed Costs/(Revenue per unit – Variable costs per unit)
Fixed costs include rent, utilities, insurance and administrative wages. Revenue is the selling price per unit. Variable costs are the materials and direct labor of production.
How Is Break-Even Calculated?
As an example, suppose your company manufactures sneakers and has the following production figures:
- Total fixed costs: $474,000
- Variable costs per pair of sneakers: $65
- Sales price per pair: $95
The break-even point in unit volume is:
- Break-even units = $474,000/($95 – $65) = 15,800 pairs of sneakers
The break-even sales volume is:
- Break-even sales = Unit sales price X break-even units = $95 X 15,800 = $1,501,000
How to Use Break-Even Calculations
A break-even analysis helps to manage other aspects of your business. For example, it can:
- Set budgets: Determine the effects of changes in fixed and variable costs.
- Motivate sales staff: With break-even as the original target, sales employees can see the results of extra sales on profits and the potential for more commissions.
- Monitor and control costs: Break-even sets cost control points.
- Decide a pricing strategy: With break-even charts, managers can gauge the impact of changing selling prices on sales volume and profitability.
What is a break-even analysis going to reveal for your business? Try out these formulas yourself, check out the SCORE break-even analysis template, or give your accountant a call to determine this critical calculation.