Financial Advisor in Raleigh NC: Break-even Point Analysis
A break-even analysis helps business owners find the point at which their total costs and total revenue are equal, also known as the break-even point. This lets them know how much product they need to sell to cover the cost of doing business.
At the break-even point, you’ve made no profit, but you also haven’t incurred any losses. This metric is important for new businesses to determine if their ideas are viable, as well as for seasoned businesses to identify operational weaknesses.
What is a break-even point?
A break-even point is used in multiple areas of business and finance. In accounting terms, it refers to the production level at which total production revenue equals total production costs. In investing, the break-even point is the point at which the original cost equals the market price. Meanwhile, the break-even point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss.
Benefits of a Break-even Analysis
A break-even analysis can help with many things, including:
Finding missing expenses. A break-even analysis can help uncover expenses that you otherwise might not have seen coming. Your financial commitments will be determined at the end of a break-even analysis, so there won’t be any surprises down the line.
Limiting decisions based on emotions. Making decisions based on emotions is rarely a good idea, but it can be hard to avoid. A break-even analysis leaves you with hard facts, which is a better viewpoint from which to make business decisions.
Setting goals. You will know exactly what kind of goals need to be met to make a profit after a break-even analysis. This helps you set goals and work toward them.
Securing funding. Often, you will need to use a break-even analysis to secure funding and show investors the plan for your business.
Clear Product Pricing. A break-even analysis will show you how to properly price your products from a business standpoint.
Business Break-even Points
As a business owner, you need to understand what it means to break even and how to calculate the break-even point. These are critical ways to determine whether the business is making a profit. Be careful not to confuse generating revenue with making a profit, as well as the difference between a net profit versus a gross margin and fixed costs versus variable costs (both of which you'll need to calculate the break-even point).
When a business reaches the break-even point, (which is also referred to as the point of breakeven) the business is no longer operating at a loss. It's not operating at a profit either, but it's no longer losing money. Normally associated with startups, break-even is often used in established businesses as well.
Break-even Formula for Businesses
The break-even formula for a business provides a dollar figure that is needed to break even. This can be converted into units by calculating the contribution margin (unit sale price less variable costs). Dividing the fixed costs by the contribution margin will provide how many units are needed to break even.
The information required to calculate a business’s BEP can be found in its financial statements. The first pieces of information required are the fixed costs and the gross margin percentage.
It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even. To do this, calculate the contribution margin, which is the sale price of the product less variable costs.
The Bottom Line
The break-even point is an important financial metric, which helps to analyze business and its viability. It definitely helps in lowering risks, setting price and targets, helps with additional funding, but for the long-term, it cannot be the only one tool to judge the financial health of any business.
Sources
https://www.forbes.com/advisor/in/investing/calculate-break-even-point/
https://www.nerdwallet.com/article/small-business/break-even-analysis
https://www.paychex.com/articles/finance/how-to-calculate-your-business-break-even-point
Disclosures:
This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
