How to Use a Break-Even Analysis in Financial Planning
A break-even analysis is important in several different situations:
As your business plans new products, knowing the break-even point helps you price more efficiently.As you plan your overall business cash and profit strategy, break-even can be used to determine profit points for product lines. As your business plans for financing, knowing your overall company breakeven point can help make your case for a business loan.
Gathering Information for Analysis
Before you begin your break-even analysis, you’ll need some information. Let’s say you’re dong an analysis for a potential new product. Make a list of all your costs and expenses relating to that product, including facilities, the cost of materials and supplies, machines or equipment, and costs for paying employees to make the product and prepare it to ship. You’ll also need to know two other pieces of information:
The range of prices you are considering, starting at $0.00The range of quantities you estimate being able to sell, starting at none (0)
5 Steps to Creating a Break-Even Analysis
Here are the steps to take to determine break-even: A simple formula for break-even is: Break-even quantity = Fixed costs/(Sales price per unit –Variable cost per unit). This formula is best expressed in a spreadsheet because variable cost changes. The spreadsheet shows you break-even for a range of costs and sales prices.
Analyzing a Break-Even Chart
Now that you have break-even, what do you do with this information? You want to find the highest price you can sell the product at and still make a profit. See what happens when you change either fixed or variable costs to see what happens if you reduce them. Maybe you can increase the volume by finding new markets. What happens when output volume rises or falls. All of these can affect your business profits on this product. Of course, a break-even analysis isn’t created in a vacuum. If you’re creating a new product that no one’s ever seen before, you have no idea what the volume would be or how soon competitors might pop up. But at least it gives you a way to begin your search for the “best” price for your product.
