Break-even Analysis

Chapter 17: Finish the Financials - Page 17.6

Break-even Analysis

You prepared a preliminary break-even analysis in Fundamentals: Initial Assessment. Now it's time to go back to that and review the numbers. The next illustration shows (again) the standard break-even analysis included in a standard business plan.

This is a monthly break-even analysis. It assumes monthly fixed costs, and per-unit sales price and variable costs. It uses the standard break-even formulas detailed below, but suggests some modified assumptions. Where standard fixed costs are supposed to be costs that would be sustained even if the business stopped, we suggest you use operating expenses instead. I suggest this change in standard financial analysis because you are better off knowing break-even points on real operations, rather than on some theoretical calculation of fixed expenses.

Break-even Assumptions

The units break-even point is:

Fixed Cost ÷ Unit Price - Unit Variable Costs

The sales break-even point is: The sales break-even point is:

Fixed Cost ÷ (1-(Unit variable Costs/Unit Price))

This section of the model calculates technical break-even points, based on the assumptions for unit prices, variable costs, and fixed costs.

The break-even analysis depends on assumptions for fixed costs, unit price, and unit variable costs. These are rarely exact assumptions. This is not a true picture of fixed costs by any means, but is quite useful for determining a break-even point.

Break-even Chart

This chart shows the break-even analysis that compares unit sales to profits, and assumes:

Fixed costs of $94,035

Average per-unit revenue of $325

Average per-unit variable cost of $248

as shown in the table above.

The line on the chart shows profits increasing and crossing the break-even line at approximately 1,220 units.

Summary

Your financial tables are interrelated. The sales and personnel forecasts and assumptions affect the profit and loss, the profit and loss affects cash, and the cash and balance sheet work together.

Financial analysis is rarely a true step-by-step process. You will probably have to go back through your tables to review the assumptions for realism and accuracy. As you revise assumptions, make sure you constantly check back to keep your cash balance positive.

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