Camino Financial03 Feb 2024
One of the primary goals of any small business is to become profitable. But how can you know when this is actually happening? Performing a breakeven analysis of your small business is a great way to see exactly when your business will start generating enough revenue to cover all expenses so that you can start to turn a profit.  While you might not be familiar with this process, it is, fortunately, fairly simple to do. By becoming familiar with the formula and understanding what factors impact your breakeven point, you can easily perform your own breakeven analysis.

## Breakeven Analysis Formula

Ready to perform a breakeven analysis on your business?  All you need to do is utilize a simple formula to find your breakeven point. The formula for a breakeven analysis is as follows:

Breakeven Volume = Fixed Costs / (Sale Price Per Unit - Variable Cost Per Unit)

Your fixed costs are the costs that remain the same no matter how many items you sell. This also includes startup costs like rent, insurance, equipment, and similar expenses as they are costs that need to be covered to sell your items. The sale price per unit is the price of each unit sold.  The variable costs per unit are recurring costs that you must cover for each item you sell, meaning these costs will increase as your sales volume increases.  The sale price per unit minus the variable cost per unit is your contribution margin. With this formula, you are calculating the total number of units you must sell in order to break even. This is the point at which you have offset all of your business expenses. Every item sold after this point will increase your business profits by the amount of your contribution margin.

## Breakeven Analysis Chart

A breakeven analysis chart is essentially a visualization of the breakeven formula. Your expenses, as well as your income, are plotted on a graph and the point at which the two lines intersect indicates the point at which your business is not making either a profit or loss. Using a breakeven analysis chart is a great way to see how your expenses will increase as your sales volume increases as well as how long it might take your business to achieve profitability.  This can be a great tool for profit planning as it helps you determine whether or not your business will realistically be able to generate enough revenue to reach the breakeven volume.

## A Breakeven Analysis in the Real World

How does a breakeven analysis work in the real world? Let’s take a look at an example. Say you run a business in which you sell laptop computers. You’ve determined that the fixed costs for your company add up to \$30,000. This could include anything from property taxes, insurance, utilities, and any other costs that do not change as your sales volume changes. The variable costs include the materials and labor needed to produce each computer. For example, computer parts, such as the keyboard, screen, battery, etc., would all be considered variable costs. Additionally, you would have to consider hourly labor costs. For this example, assume your variable costs amount to \$200 and you sell each laptop for \$500. With these numbers, your contribution margin would be \$300. Now, we can calculate your breakeven volume using the following formula:

Fixed costs: \$30,000

Sale price per unit: \$500

Variable cost per unit: \$200

Breakeven Volume = 30,000/(500 - 200) = 100 units