The Importance of the Breakeven Point

Financial information is the key to understanding the business's profitability, and knowing the numbers is essential for learning about your company and planning for the future.

Conducting a breakeven analysis is a critical step for every business to determine what sales volume is necessary to cover costs. It's especially crucial for start-ups that need to know their initial sales goals.

What is the breakeven point?

The breakeven point is the point where a business's total revenue is equal to its total expenses. This means at the breakeven point there's no profit; it's simply net zero.

How to calculate breakeven point

Simply, the breakeven point is: Total fixed costs / (Selling price - total variable costs).

Where to start with breakeven analysis

If you have never conducted a breakeven analysis before, you should start by assessing the company’s most commonly sold products and services. Business owners need to gather a lot of information, such as the total fixed cost of making each product, the variable costs for each product, the sales price of that product, and then the net profit derived from selling it, or installing it.

Why is breakeven analysis important?

This figure is important because it's the simplest way for a business to determine if what it charges for its products and services will cover what it costs to make the products or provide those services. The higher the fixed costs for the business, the higher the breakeven point will be, meaning the more offerings it needs to sell.

The process of determining the breakeven point is a good time for businesses to assess their true cost of doing business and their prices. Many start-ups don't understand their direct and indirect costs very well. Working on a breakeven analysis will help business owners and managers learn these figures and gain better insight into the accuracy of their prices and how realistic their sales goals are.

If the amount of sales a company needs to break even is more than it can realistically achieve in a year, then the business knows its products or services may not be priced well – or it needs to work to reduce costs.

Additionally, the business owner should know the total contribution each product and service makes to the company's overall profit. This step is important because it can help businesses determine products and services that aren't actually profitable, and the company can decide if it needs to raise the price, reduce the cost of offering it, or possibly discontinue it.