Break-even Analysis

Chapter 3: Initial Assessment - Page 3.5

Break-even Analysis

Some people find a simple break-even analysis is a good way to get a quick view of the underlying running expenses, pricing, and costs in a business. This doesn't have to be a carefully researched and detailed break-even at this point — that will come later as you develop a full plan. For initial assessment, a simple estimated break-even might still be useful. A simple Break-even Analysis table is shown here:

Break-even Analysis Table

The Break-even Analysis table calculates a break-even point based on fixed costs, variable costs per unit of sales, and revenue per unit of sales.

Make the following three simple assumptions:

• Average per-unit sales price (per-unit revenue):

The price that you charge per unit. Take into account sales discounts and special offers. For non-unit based businesses, make the per-unit revenue $1 and enter your costs as a percent of a dollar.

• Average per-unit cost:

The incremental cost of each unit of sale. If you are using a Units-Based Sales Forecast table (for manufacturing and mixed business types), you can project unit costs from the Sales Forecast table. If you are using the basic Sales Forecast table for retail, service and distribution businesses, use a percentage estimate. For example, a retail store running a 50% margin would have a per-unit cost of .5, and a per-unit revenue of 1.

• Monthly fixed costs:

Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, you may want to use your regular running fixed costs, including payroll and normal expenses. This will give you a better insight on financial realities.

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