Break Even Analysis – Moving from Profit Zero to Profit Hero
Break even analysis is a major point of financial focus in your business.
You’ll probably give it most attention when your business output is at a level that is below or just around it, and it is the point at which your business sales (and hence output) make neither a loss nor a profit, but just cover the fixed costs of your business.
The financial information in your business plan needs to show you have calculated your break even point, and can express it in terms of your home currency sales and units.
Some business owners prefer to express their break even point in break even charts that show fixed and variable costs plotted together alongside revenue.
Let’s go through an example to show you how to work out the figure for your business plan
Let’s say your company makes the new superwidget.
To make the new superwidget, you invested $25,000 in tooling, and had to rent a unit to accommodate the new machinery. You needed to pay $5,000 to the local power supply company to get the power upgraded.
These costs are fixed costs and in total come to around $50,000
To make a widget, you buy 2 different kinds of raw materials, and it takes 1 hour of labour and 0.5 hours of machine time. You think power will take about 0.75 hours due to warm up and cool down time and packaging costs are also relevant.
Overall these variable costs come to $58. You estimate your average selling price per unit will be $96 based on quotes you’ve received from other suppliers selling this product.
From these figures, you can now perform the break even analysis for my business. The formula is:
Fixed Costs / (Unit Sales Price – Unit Variable Cost) or in this case:
50,000 / (96-58)
= 1316 units (rounded to the nearest whole number)
To convert this into a sales value simply multiply the break even units by your selling price.
So 1316 units x 96 = £126,366
There you have it. Your break even analysis shows that you break even at 1316 units or £126,366. Wow!
Now you’ve got to relate this to physical activities and timescales. How many orders and hence customers does it mean? How long will it take you to get there? Do you have a sales plan to achieve it?