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By FindLaw Staff | Legally reviewed by Robert Rafii, Esq. | Last reviewed October 28, 2022
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The break-even point is the point at which total revenue and total cost of doing business are equal. Determining a break-even point by conducting a break-even analysis is a critical part of any business plan. This financial analysis is used by entrepreneurs to determine if their new business idea has a chance of success.
This article explains how to calculate the break-even point for the business idea you've chosen for your startup business.
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A break-even analysis is applied in many different situations in business, from stock and options trading to project budgeting. Doing a break-even analysis helps a small business owner avoid investing in product lines or business ideas that aren't likely to be profitable. It helps an investor see when they may begin to recoup their investment.
When used in the context of a startup business, a break-even analysis calculation can be used to:
You can create a break-even formula in Excel. Refer to the following formula:
You can also use a pre-existing break-even analysis template such as the one provided on the website of the Senior Corp of Retired Executives (SCORE). The break-even point (BEP) is calculated by dividing the total fixed costs of production by the difference between the price per unit and the total variable costs of production.
Fixed costs remain the same regardless of how many units are sold. These are the basic costs of doing business. You may add or subtract categories of fixed costs depending on the nature of your business. When a company needs to cut costs, these are harder to cut.
A company with low fixed costs will usually have a lower break-even point because it will have less expenses to worry about before turning a profit.
Variable costs are those costs that relate to the type and volume of products produced.
The first part of calculating your break-even point is making an accurate estimate of fixed costs, variable costs, and revenue streams. To ensure your estimate are as accurate as possible, research similar businesses, the industry in your state, and potential suppliers. Every state has resources to help with this research, including Small Business Development Centers.
The estimates that are needed for a realistic break-even analysis include the following:
After you have recorded the estimates listed above, you are ready to find your break-evenpoint. Divide your estimated monthly overhead by your gross profit percentage. This quotient is the amount of sales revenue you need to break even.
For example, if your monthly overhead is $5,000, and your gross profit percentage is 50%, your break-even point is $10,000 per month ($5,000 divided by 50%). So, you would need to make $10,000 a month to pay your overhead and direct sales costs.
Unless you calculated wages for yourself as part of the monthly overhead, remember that this amount does not include a salary for you or any profit at all. It is merely how to break even between your overhead and revenue. If you use the SCORE break-even template, it does include an owner's draw.
If your break-even point is higher than you expected, don't fret. Consider your options. You could:
If after changing some of these factors, your break-even point is still too high, your business idea may not be attainable. If you end up scratching the business plan, you have saved yourself a lot of time and money.
If you reach a desirable break-even point, you know you can continue with your business plan, and you have an idea of your budget.
Break-even analytics limitations can be considerable. A break-even analysis is only as accurate as the data you've put into it, and it will require you to assume some things that can't be absolutely known:
A break-even analysis may be too simplistic a measure to use if you have multiple products with multiple price points.
Furthermore, a break-even analysis doesn't consider start-up costs or the amount of capital invested in the business. Capitalization is a key factor in profitability.
If your break-even analysis gives you a favorable break-even point, you can continue to the next steps in your financial analysis for a stronger sense of the future profitability of your business. Continue your financial analysis to identify:
A break-even analysis is the baseline measure to determine whether your business idea is a winner. If it looks like your business has a chance at success, consult with a business attorney about your next steps and any legal requirements.
Contact a qualified business attorney to help you navigate the process of starting a business.
We have a DIY option you can use to save time and stress.We help you:
Prefer to work with a lawyer?Find one right now.