As a business owner, it is crucial to measure your business’s financial success. There are various formulas, ratios, and analyses that measure a business’ financial progress. This article will outline the break-even analysis.
Break-even analysis is the intersection of revenue and costs. It’s the point at which a business makes no profit, any number below the breakeven point is a loss and any number above the breakeven point is a profit.
There are a few terms to understand before considering calculating breakeven:
Fixed Costs: Costs that remain unchanged at any level of output from period to period.
Contribution Margin: This figure represents the amount of money available to cover the fixed costs.
Variable Costs: Costs which shift based on the output of a good or service.
Now, we’re ready to calculate the breakeven!
Fixed Costs divided by Contribution Margin
Contribution margin: Revenue per unit – Variable cost per unit
Breakeven is a powerful measurement tool and is highly recommended during a business monthly financial analysis. The overall purpose of calculating the breakeven point is to give business owners an understanding of the minimum output required to experience a profit. This formula can be used in conjunction with others to make wise financial decisions.