What is Break Even Point?
The Break Even Point is the necessary level of output for a company’s revenue to be equal to its total costs – or said differently, the inflection point at which a company begins to generate a profit.
How to Calculate Break Even Point (Step-by-Step)
For all business owners, particularly during the earlier stages of a business, one of the most crucial questions to answer is: “When will my business break even?”
All businesses share the similar goal of eventually becoming profitable in order to continue operating.
By understanding the required output to break even, a company can set revenue targets accordingly, as well as adjust its business strategy such as the pricing of its products/services and how it chooses to allocate its capital.
If a company has reached its break-even point, this means the company is operating at neither a net loss nor a net gain (i.e. “broken even”).
All incremental revenue beyond this point contributes toward the accumulation of more profits for the company.
Conducting a break-even analysis is a prerequisite to setting prices appropriately, establishing clear and logical sales target goals, and identifying weaknesses in the current state of the business model that could benefit from improvements (e.g., sales tactics and marketing strategies).
Furthermore, established companies with a diverse portfolio of product/service offerings can estimate the break-even point on an individualized product-level basis to assess whether adding a certain product would be economically viable. In effect, the analysis enables setting more concrete sales goals as you have a specific number to target in mind.
Break Even Point Formula
To take a step back, the contribution margin is the selling price per unit minus the variable costs per unit, and this metric represents the amount of revenue remaining after meeting all the associated variable costs accumulated to generate that revenue.
That said, when a company’s contribution margin (in dollar terms) is equal to its fixed costs, the company is at its break-even point.
If its contribution margin exceeds its fixed costs, then the company actually starts profiting from the sale of its products/services.