What is a break even analysis and how do I do one?
A break even analysis will show when a business becomes profitable. It’s the process of showing how much money you will need to make to at least cover your business expenses.
‘Break even’ describes the point where you aren’t making a loss, but you aren’t making a profit either, while paying all your expenses.
Why is a break even analysis important?
The information shown in your break even analysis will help you make decisions for your business. For example, simply setting a goal of how many goods you need to sell before you start making a profit.
Beyond sales goals, your break even analysis can also inform your pricing strategy, make it necessary to look at your expenses to cut back costs, and make long term plans for your business.
If you’re making a business plan or trying to gain funding, you’ll need a break even analysis. A break even analysis shows how viable your business is, and will be important to any investors or potential business partners.
How to do a break even analysis
You can do a break even analysis over any point in time, but it’s most common to do it over an annual period.
First, you need to know your variable (production) cost for producing each product. This includes any labour, packaging, shipping etc.
Then, figure out your average price for each unit. If you haven’t already decided how to price your goods, you can read our guide here.
Then deduct your variable costs from the average price. This will give you the gross profit for each sale.
Next, calculate your fixed costs for a set period of time. Your fixed costs are expenses that you need to pay on a regular basis to run your business, like paying rent, bills or employee salaries.
Now, divide your fixed costs by the gross profit. This will show you how many units you need to sell before you break even.
Manage your finances with accounting software
Online accounting software like Bokio gives you everything you need to manage your finances in one place, so you have all the information you need to make the right decisions for your business.
Bokio is a simple way to do your accounting, invoicing and more online. Our software takes you through the process step by step, with time saving features like automated bank feeds, smart bookkeeping templates and integrated invoicing. If you need help with your accounting, you can invite your accountant or colleagues to work together in Bokio.
Accounting is kept simple with Bokio, so you have more time to spend running your business.