What is a break-even analysis?
Break-even analysis is the process of determining an organization's break-even point. It requires considering fixed cost, variable cost, price per unit, and number of units. Break-even analysis helps when:
You want to identify the number of units you need to sell to reach the break-even point
You know the number of items you need to sell, but want to decide on the right price for your product
How can the break-even point help your business?
The break-even point is a great metric and an important tool that helps your business in a lot of ways. Here are the top three benefits of the break-even point in running your business:
Feasibility
It's important to study the feasibility of any project or new product line that you're planning to launch. With break-even analysis, you can identify the time and price at which your business will turn profitable. This helps you plan the range of activities you need to reach that point, set up a turnaround time for your tasks, and stick to a timeline.
Analysis
Fluctuations in business are a common scenario. External circumstances, like trade agreements and changes in the political climate, have an impact on your sales. This may cause your variable or fixed costs to surge. In such cases, break-even analysis will help you to decide on new prices for your products. The break-even point gives you a clear picture of how much time will it take for your business to recover any losses and break even again after a change in the business forecast.
Strategy
Strategy making is an integral part of any organization. Whether you're trying to promote your brand-new product, stay ahead of your competitors, or cut down on your expenses, you need to have a strategy in place. Break-even analysis helps you to formulate these strategies. If you have a break-even point tool, you can try out changes to variables like the cost involved in the promotions or the rate of depreciation, and calculate how many units you need to sell to reach the break-even point. This helps you craft a more formidable strategy and reap better benefits for your company.