Break-even point analysis examines how much a company can safely stand to lose before descending below its break-even point.
At the “break-even point,” a company would not be making a profit, but it also wouldn’t be experiencing any losses. While they wouldn’t be making any money, all their costs would still be covered.
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Break-even point is an analytic tool that helps businesses to understand what their lowest margin of growth should be. In a worst-case scenario, a company would want to make sure that they could at least cover their expenses. Even if they are not bringing in a profit, they still want their rent to be taken care of and employee salaries to be paid.
If they can stay at or above the break-even point, they know that they still make changes to become more profitable in the future. If they drop below that point, they will have to make some serious changes to avoid being shut down. Essentially, a company’s break-even analysis is a major factor in its stability.
As a result, a company (or its investors) could use the spreadsheet to calculate how much funding it might need to produce growth and increase its profits.
In contrast, the analysis only focuses on predicting the return, based on costs and units. It does not take the actual sales into account. Still, break-even analysis can help you set revenue targets.
How to Use the Excel Spreadsheet
This is a model for beginners to learn how break-even analysis works. Simply input the following information:
- Sales price and volume
- All fixed costs
- All variable costs
The template will then calculate the break-even point in units sold and sales, as well as showing you the contribution margin.
You can find out more about the break-even point, including more detailed examples, in our lesson here:
FAQs
1. What is break-even point analysis?
Break-even point analysis is a process of evaluating how much sales volume or units must be sold to cover the total costs associated with producing a good or service. This includes both fixed and variable costs.
