The Significance of Break Even Analysis and How to Calculate the Break Even Point

by Jason Varner Financial Projections Template

What is break even analysis and why is it beneficial to prepare for a business or investment?

A break-even analysis involves the calculation and the evaluation of a project’s feasibility by determining which month or year from now a business becomes profitable or able to at least cover the costs incurred. Basically, once you've reached the break-even point, you are neither losing money nor making money but all your costs have been covered. Basically, break even analysis is a useful tool as a metric to calculate the level of fixed costs relative to the profit earned by the project.

By simply conducting a break even analysis, a business can benefit by being able to set a solid business plan as well as ensure a steady stream of revenue and maintain profitability. The same can be said for investments where you need to know when you will be able to reach the break-even point and earn better returns.

There are a few commonly used calculation methods to determine the break-even point such as:

• Based on Units – calculating based on the number of units of products sold which can be better expressed with the formula: Break-even Point (Units) = Fixed Costs / (Revenue per Unit – Variable Cost per Unit).

• Based on EBITDA – calculated based on the earnings before interest, taxes, depreciation, and amortization for a business plan. By simply calculating the EBITDA, it can be used to determine the break-even point as you arrive at positive cash flow.

• Based on Sales Dollars – calculated based on the point in sales dollars which can be better expressed with the formula: Break-even Point (Sales Dollars) = Fixed Cost / Contribution Margin Ratio where the contribution margin ratio is calculated as contribution margin per unit divided by the sales price.

The above are just the most commonly used approaches that one can calculate the break-even point of a business or investment. But of course, there are other ways to conduct a break even analysis such as making use of advanced tools. One of these tools is the break even analysis calculator which can easily calculate the break-even point of a business or investment by simply inputting the required variables for calculation. This calculator is usually included in a complete financial model which one can build to evaluate a business or investment’s financial feasibility.

If you’re in need of financial models which includes a break even analysis calculator, you can check out the list of financial model templates here: Break Even Model Templates. These templates are very useful which not only allows you to conduct a break even analysis but you will also be provided with a solid financial plan for your business. You can also get other industry-specific financial model templates for different use cases at eFinancialModels, a platform with a wide range of templates made by financial modeling experts with a substantial amount of experience as well as extensive know-how.