What is a Break-Even Analysis?

A break-even analysis is a valuable calculation that is helpful with both large and small business accounting. Essentially, the break-even analysis is a process that allows an entity to determine the amount of generated revenue must be produced in order to cover all the costs of operating the business. Conducting a periodic break-even analysis helps a company to position itself so that the business is competitive, is able to reach a point where the company becomes profitable, and also help the business prepare for expansion.

The elements that go into a break-even analysis are very straightforward. The first step is to identify and account for all expenses associated with the business venture. This will include both fixed costs and variable costs. For purposes of arriving at the break-even analysis, taxes certainly are taken into consideration. Factors such as the cost of raw materials, labor, management of labor, plant operations and machinery, sales, marketing, and packaging all go into the calculation. Even costs such as electricity and other utilities that are needed to operate facilities are considered to be costs associated with the overall business operation.

The total cost of operation is compared to the total amount of sales that result as a part of the effort. Breaking down the sales into unit price increments, it becomes possible to determine how many individual units of the goods or services offered by the company must be sold in a given period to cover the production costs for that same period. The hope is that the break-even analysis will demonstrate that the company is selling enough units to not only cover all expenses, but also enough additional units to result in a net profit for the corporation.

Performing a break-even analysis is helpful for several other reasons as well. The analysis can be used as a tool in forecasting overall projections for upcoming periods. Adjustments in operation or production can be made as a response to the findings of the analysis. In the event of a possible new product launch, the break-even analysis can use historical data to determine how many units of the new product will need to be sold in order to maintain the current level of profitability. In general, the break-even analysis can use past data as an important calculator of what could happen in the future.