A break-even point is the point in which total cost and total revenue are equal, ie. zero profit. If total cost dips below this point, there will be a profit. If sales rises above this point, there will be a profit.
Why is this Important to a Business Owner?
As a business owner, you need to know whether your business is generating enough revenue to cover all the expenses that the business incurs.
You need to know whether your profits or services are profitable, or whether they are being sold at a loss. It is important to know this as it means the difference between the business thriving or going belly up.
If your business does not earn enough to cover its expenses, it doesn’t matter how much sales it is raking in – your business is still losing money!
How to Calculate Break-Even Point
The formula for break-even point is as follows:
Break even quantity = Fixed costs ÷ (Sales price per unit – Variable cost per unit)
- Fixed costs are costs that do not change with varying output (e.g., salary, rent, machinery).
- Sales price per unit is the selling price per unit.
- Variable cost per unit is the variable costs incurred to create a unit.
Profit is achieved when Revenue > Total Variable cost + Total Fixed cost
Break-even point happens when Revenue = Total Variable cost + Total Fixed cost
Loss results when Revenue < Total Variable cost + Total Fixed cost
Once you know your business’s break-even point, you have a target that tells you how much cash you need to cover costs. Without this figure in mind, you are shooting blindly, not knowing what your business’s critical financial target is.
With this target in mind, you are now able to determine what needs to change in terms of pricing strategies and financial strategies.
A solid break-even analysis will inform your decisions on when prices should be increased so your business’s profit margin increases. It will also inform where you need to reduce expenses and cut costs.
Disclaimer: This blog post has been simplified to cover some key points of break-even analysis. This should not be construed as advice from Glint Accountants. There are many other factors to be considered and each business situation is unique. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Geraldine Lee is Fellow of CPA Australia and virtual CFO. Here at Glint Accountants, we help you to understand the KPIs of your business and develop a strategy to ensure the profitability and growth of your business. After all, that’s what we do, day-in-day-out. Contact us today!