Someone who is trying to start a new business often wonders, “At what point will I break even?†A break even point (BEP) is the point where costs are exactly equal to sales/revenue. At this point, the business makes no profit and yet doesn’t suffer from loss either. The break even point indicates the level of sales needed to just to cover costs. Sales above this point will result in profit, vice versa.
To calculate the break even point we basically need to consider several factors, which are:
- Average per unit sales price,
- Average per unit variable cost, and
- Average annual fixed cost
Fixed costs are constant expenses that don’t change no matter how many unit of products are produced. While variable costs will increase as the unit of production goes up. This is why variable costs are often stated on a per unit basis.
The break even analysis, of course, is oversimplified. In most cases, it is almost impossible to determine the exact break even point due to the company’s many customers, the company’s many products, and the interaction between price and sales. These many factors will complicate the break even analysis. But it is still a useful tool that could provide some insight as to how profit and loss change as sales level decrease or increase.
Calculating BEP can keep you very occupied if done manually. You can use the following Microsoft Excel template to make your job easier.
Download
Microsoft Excel Breakeven Point Template (11 kb)
You don’t need to go to business school to understand when a company will break even. In fact, many school activities for children are focused around earning and keeping track of money. If you do need a business refresher course, there are many online learning resources that could be helpful.
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