Break-Even Analysis

101: How to
Calculate BEP and
Apply It to Your
Business

When will I break even? It’s one of

the biggest questions you need to
answer when you’re sta ing a
business. And that’s why it’s so
crucial to conduct a break-even
analysis, which helps you determine
fixed costs (like rent) and variable
costs (like materials) so you can set
your prices appropriately and
forecast when your business will
become profitable.

Central to the break-even analysis

is the concept of the break-even
point (BEP).

A system that grows

with your business.
We're with you from Square one to
whatever’s next.

L E A R N M O R E

What is the break-even point for

a business?

A business’s break-even point is the

stage at which revenues equal
costs. Once you determine that
number, you should take a hard look
at all your costs — from rent to
labor to materials — as well as your
pricing structure.

Then ask yourself these questions:

Are your prices too low or your
costs too high to reach your break-
even point in a reasonable amount
of time? Is your business
sustainable?

Calculating your break-even

point

There are a few basic formulas for

determining a business’s break-
even point. One is based on the
number of units of product sold and
the other is based on
points in sales dollars.

● To calculate a break-even point

based on units: Divide fixed
costs by the revenue per unit
minus the variable cost per
 unit. The fixed costs are those
that do not change no matter
how many units are sold. The
revenue is the price for which
you’re selling the product
minus the variable costs, like
labor and materials.

Break-Even Point (Units) =

Fixed Costs ÷ (Revenue per
Unit – Variable Cost per Unit)

● When determining a break-

even point based on sales
dollars: Divide the fixed costs
by the contribution margin. The
contribution margin is
determined by subtracting the
variable costs from the price of
a product. This amount is then
used to cover the fixed costs.

Break-Even Point (sales dollars)

= Fixed Costs ÷ Contribution
Margin

Contribution Margin = Price of

Product – Variable Costs

To get a better sense of what this

all means, let’s take a more detailed
look at the formula components.

● Fixed costs: As noted above,

fixed costs are not affected by
the number of items sold, such
as rent paid for storefronts or
production facilities,
computers, and software. Fixed
costs also include fees paid for
services like graphic design,
adve ising, and public
relations.

● Contribution margin: The

contribution margin is
calculated by subtracting an
item’s variable costs from the
selling price. So if you’re selling
a product for $100 and the cost
of materials and labor is $40,
then the contribution margin is
$60. This $60 is then used to
cover the fixed costs, and if
there is any money left after
that, it’s your net profit.

● Contribution margin ratio: This

figure, usually expressed as a
percentage, is calculated by
subtracting your fixed costs
from your contribution margin.
From there, you can determine
what you need to do to break
even, like cutting production
costs or raising your prices.

● Profit earned following your

break even: Once your sales
equal your fixed and variable
costs, you have reached the
break-even point, and the
company will repo a net profit
or loss of $0. Any sales beyond
that point contribute to your
net profit.
How to use a break-even
analysis

A break-even analysis allows you to

determine your break-even point.
But this isn’t the end of your
calculations. Once you crunch the
numbers, you might find that you
have to sell a lot more products
than you realized to break even.

At this point, you need to ask

yourself whether your current plan
is realistic, or whether you need to
raise prices, find a way to cut costs,
or both. You should also consider
whether your products will be
successful in the market. Just
because the break-even analysis
determines the number of products
you need to sell, there’s no
guarantee that they will sell.

Ideally, you should conduct this

analysis before you sta a business
so you have a good idea of the risk
involved. In other words, you should
figure out if the business is wo h it.
Existing businesses should conduct
this analysis before launching a new
product or service to determine
whether or not the potential profit
is wo h the sta up costs.

A break-even analysis isn’t just

useful for sta up planning. Here are
some ways that businesses can use
it in their daily operations and
planning.

● Prices: If your analysis shows

that your current price is too
low to enable you to break
even in your desired
timeframe, then you might
want to raise the item’s cost.
Make sure to check the cost of
comparable items, though, so
you don’t price yourself out of
the market.

● Materials: Are the cost of

materials and labor
unsustainable? Research how
you can maintain your desired
level of quality while lowering
your costs.

● New products: Before you

launch a new product, take into
account both the new variable
costs as well as the fixed ones,
like design and promotion fees.

● Planning: When you know

exactly how much you need to
make, it’s easier to set longer-
term goals. For example, if you
want to expand your business
and move into a larger space
with higher rent, you can
determine how much more you
need to sell to cover new fixed
costs.
● Goals: If you know how many
units you need to sell or how
much money you need to make
to break even, it can serve as a
powe ul motivational tool for
you and your team.

Related A icles
Essential Components of a
Finanacial Analysis
How to Create a Cash Flow Analysis
What is a SWOT Analysis

Share: Read more in: Finances, Growth Strategies

Big businesses like

yours run on Square.
Securely accept credit cards, tokenize
buyer identity, and track behavior across
sales channels with the Square API.

C O N T A C T S A L E S

Learn More

Get the latest

business tips and
advice delivered
straight to your
inbox.
Each issue will feature a icles and advice
on how to grow sales, improve your
marketing, simplify accounting, and much
more.

Enter your email address to subscribe. S U B M I T

Subscribe to Feed
RSS Feed or
Follow on Feedly

Payments Point of Sale Hardware

English

© 2019 Square, Inc. Privacy Notice Terms of Service

G E T
S H A R E
S T A R T E D