The break-even point is the minimum sales level that equals total costs to income, that is, it is the point at which the business neither earns nor loses money. Today we tell you how it is calculated and what it is for, with examples. In addition, we bring you keys to increase your income. Let us begin!
In other articles we talk about the importance of making decisions in your business in the short, medium and long term. That is closely related to what, in the business world, is known as the break-even point.
Let’s see in detail what it is.
What is the breakeven point?
The break-even point is the level of sales that equals a company’s income with its fixed and variable expenses. In other words, it is the moment in which there are no gains or losses. A business breaks even when it sells as much as it spends.
Knowing the economic balance point of a business is essential to analyze its profitability and enhance its growth. With this clear figure, also called breakeven, you can define how much it is necessary to sell to exceed this base and start receiving profits.
Now that we are clear about what the break-even point is, we can proceed to discover how it is calculated so that you can start applying it to your business. Don’t worry, it is a short formula that you can do in a spreadsheet, as we are going to show you. Let’s keep going!
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What is the point of calculating the break-even point?
What is the point of calculating the break-even point? What are the utilities that we can find in it? This calculation is important for the following reasons:
- It provides visibility of the number of units you have to sell to make a profit.
- Organize your finances in the short, medium and long term. This will help you maintain good financial health and create timely contingency plans to deal with a possible crisis.
- Anticipate the amount of time it will take to start seeing an economic return. When doing a business, before starting a business, calculating the break-even point gives you an indication of its financial relevance.
- It allows identifying which are the most profitable products or services and those that generate losses. After this analysis you can invest in producing more of the former and discontinue the latter.
- Define if it is a good business idea, in financial terms.
- Prepare for the high and low seasons of the industry. For example, selling tights you know that the time of greatest demand and income is summer. To learn how to identify this, we invite you to read our guide on .
- Analyze the development of your company over time. Seeing if the economic balance point increases or decreases, you will understand if it is growing or if it is necessary to make adjustments to your plans.
📝 We invite you to read this article on how and its examples.
How to calculate the break-even point?
The break-even point is the ratio of fixed costs to contribution margin. The result of this account is what you have to achieve in order not to win or lose money. Let’s review these concepts to understand how the calculation is performed.
They are an essential part of managing the finances of any business. The first are those that remain the same, regardless of the number of units we manufacture. The latter are associated with production costs, that is, they increase if, for example, we generate more supply.
The contribution margin or contribution margin is a financial indicator. This is the difference between the price and the cost of sale. If in your , the first value exceeds the second, this is the money you have left available to absorb fixed expenses.
So how to calculate the break-even point? There are two ways to measure it: in units or in value.
Calculation of the break-even point in units
With this formula you will discover the minimum sales you need to find the break-even point, that is, to neither lose nor earn money.
The break-even point arises from the division between the fixed costs and the contribution margin, that is, the difference between the price and the cost of sale:
Fixed costs / (Selling price – Selling cost) = Break-even point per unit
The result of this count indicates how many items you need to sell to reach breakeven. If it is higher than the break-even point, it means that you are earning money.
For example, a brand sells fanny packs for $2,000. The production cost of each one is $1,200 and, in addition, you must consider $28,000 of fixed costs. Your breakeven calculation will be:
28,000 / (2,000 – 1,200) = 35
According to this formula, the company needs to sell 35 fanny packs to break even.
Calculation of the balance point in value
In this case, the formula will indicate what amount you must reach to equalize costs and income.
Fixed costs / (1 – Selling cost / Selling price) = Break-even point by value
Let’s continue with the example break-even point that we saw in the previous section. With this new formula it would be:
28,000 / (1 – 1,200 / 2,000) = $70,000
Here it is clearly seen what the break-even point is by value. The company needs to invoice $70,000 (the selling price of the 35 fanny packs) to reach breakeven. This calculation reflects the break-even point understood as the minimum sales level that equals total costs to revenues.
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How to graph the break-even point: example
Now that we have seen how to calculate the break-even point, we are going to teach you how to graph it in a spreadsheet like Google Sheets or Excel. This format is used to see the data in a screenshot.
The steps to follow are:
- Perform the calculation of the break-even point
- Create the table with the complete data
- Select the table and insert the chart
- Analyze chart information
Let’s see in detail how to do each one.
1. Perform the calculation of the break-even point
In a first instance, we are going to perform the same formula that we did in the previous section, so that you can see the formula in the spreadsheet.
Remember that we can calculate the break-even point by units or by value. For this, we are going to dump the information of fixed and variable costs and the sale price.
To obtain the breakeven per unit, we perform the formula that divides the fixed costs by the contribution margin, that is, the difference between the sale price and the variable costs (also called “sales cost”). As seen in the small box above the formula, the result is 35.
To obtain the economic breakeven point by value, we divide the fixed costs by the subtraction between the number 1 and the quotient of the variable costs and the sale price. As in the previous section, the result is $70,000.
2. Create the table with the complete data
It is time to be more clear about what your income or loss would be in cases where you sell more or less than what the break-even point of your business implies.
For that, we are going to prepare a table with multiple rows that allows you to see how your financial scheme would look depending on the units you sell. We include the columns for sales, costs (including fixed and variable) and profits.
This last concept refers to or loss. Consequently, 0 will be the balance point; if you get a higher number, you are receiving money income and, if it is lower, it is a loss.
The following is the reference of our example:
We define the unit scale from 5 to 5 to have a broad reference. In Sales, we multiply the number of items by the unit price, using the cells in the bottom box fixed. The formula was = A2 * $B$17.
⌨️ Professional tip! To fix cells in your formulas you have to include a dollar sign ($) before the column letter and the row number.
Costs are calculated by multiplying the units in the row by the variable costs and adding the fixed costs to this. In our example, the formula is = A2 * $B$19 + $B$18.
Finally, the Profits are obtained by subtracting the sales with the costs, in cell we have = B2 – C2. In this case, we put negative numbers in red to have visibility of the rows in which the business is losing.
3. Select the table and insert the graph
We already have all the data in our table, great! What remains is super simple. Select the complete table, including the titles. Then, in the “Insert” dropdown menu, click on “Chart”.
Both Google Sheets and Excel interpret the chart data to give you the most convenient format. In any case, you have many adjustment and customization options: from the design (colors, typography or size), to the configuration of the axes (values and scales) and the titles.
4. Analyze the chart information
You already have the graph of the economic balance point of your business. What remains is to take the time to study these numbers in order to master the finances of your business and think of actions to enhance it.
The balance point in the graph that we put as an example, appears at the intersection between the blue and red lines. To the left we visualize the loss margin and, to the right, the profit margin.
Then, it is about finding the ones that work best with your field and allow you to increase your income. Keep reading to discover the ones we recommend the most!
9 tips to optimize your expense chart
1. Optimize advertising campaigns
The expenses you budget for should become more efficient over time and as you track metrics. Your goal has to be to reduce the cost per click and the cost per conversion.
2. Use digital marketing resources
There are many tools available to perform tasks in a massive or automated way. For example, it allows you to run ad campaigns involving Facebook and Instagram at the same time.
3. Review your pricing strategy
This is a delicate variable, which must be treated carefully, because people can become discouraged with your brand if they see sudden increases in values, for example.
It is necessary to know what the price means for your target audience to understand if sales will decrease or not, when making an adjustment in your favor. This will allow you to obtain a higher income for each transaction.
4. Reduce the cost of goods sold
Another way to obtain more economic revenue with each sale is to reduce production costs.
If you manufacture your products, you can check if there are ways to get your raw material at more affordable prices or modify the…
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