While managing your business and being your own boss feels great, the real success comes when you actually start making money. To stay on top of your finances, you must know how much you need to sell to cover your costs. Understanding break-even analysis will help you make smart business decisions and know that your venture is truly beneficial.
You don’t have to be a number genius to take charge of your finances with this Break-even Analysis template at Wordlayouts. This Excel-based template will help you gain clarity and calculate your break-even point in a few simple steps. Whether you are a start-up founder, a small business owner, or a financial planner, this easy-to-use template gives you clear insights into the financial future of your business by automatically calculating the break-even point in units and dollars.
What is a Break-Even Analysis?
The break-even point is where total revenue and total cost are equal. At this point, you are not making any money, and neither are you losing any—thus, all your costs are covered! So, from this point onwards, any sales you make will be your profit.
Break-even analysis means the number of units or amount of revenue that’s needed to cover your business’s total costs. This analysis will help you determine when your business will become profitable and you will be able to recoup your investment.
How Do I Calculate the Break-even Point?
You can calculate the break-even point in sales and in units. To calculate the break-even point for your business, you can use the following equation:
Break-Even Quantity = Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)
Break-even in Sales = Fixed costs / [(Sales Price Per Unit – Variable Costs Per Unit)] /Sale Price per Unit
In this equation, Fixed Costs are the costs that do not change with changes in levels of production. For example, rent, salaries, property tax, etc. On the other hand, Variable Costs are costs that are directly related to the level of production or sales. These include raw material costs, packaging costs, and utility usage that changes with production, etc.
Let us look at a simple example to understand how to calculate the break-even quantity from the given equation.
Sample calculation for break-even units and sales
Suppose a company sells bicycles, and their fixed costs (rent, insurance, salaries, etc.) are equal to $300,000. The variable costs (labor who is hired for hourly work, packaging, materials, etc.) are $15 per bicycle.
The price for each bicycle is $80.
So now, with this information, let us see how many bicycles the company needs to sell to reach the break-even point.
Substituting the values into the formula:
Break-Even Quantity = Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)
= 300,000/ 80-15
= 4,615.38 bicycles
So, the company needs to sell 4,616 bicycles to break even.
Now, we can also calculate the break-even point in sales.
Break-even point in sales = Fixed costs / [(Sales Price Per Unit – Variable Costs Per Unit)] /Sale Price per Unit
= 300,000/ 0.8125
= $370,370
So,
The break-even point for the bicycle company in this example is:
- 4,616 bicycles
- $370,370 in sales
Now that you have a grip on the break-even analysis and the details of the calculations, you can use the Break-Even Analysis Template with confidence to handle calculations for your business.
This user-friendly template is designed to help you quickly calculate the break-even point and sales to gain useful financial insights for your business. The automatic calculations and the visual charts and graphs are used to understand financial data at a glance.
Read on to learn how you can use this template and make informed decisions.
Break-Even Analysis Template: An Empowering Resource for Financial Planning
To use this template, just follow these steps, and you can easily calculate the break-even point for your business.
Step 1: Enter basic information
At the start of the template, you will have to enter three types of information:
- Company Name
- Product Name
- Sale price per Unit
Step 2: Enter fixed costs for your business
Next, move on to the section Fixed Cost. Here, specify the various types of costs that do not change regardless of the level of product or sale. The template has already given some examples as an illustration, such as rent, salaries, etc. Once you have specified each component of your fixed cost as shown in the image below, the template automatically calculates the total fixed costs.
Step 3: Fill in the variable costs
To conduct the break-even analysis, you also need to know the variable costs for your business besides the fixed costs.
Go to the section labeled Variable cost per unit and manually fill in the variable costs, such as raw materials, packaging, shipping, etc.
Remember, these are per-unit costs that you must enter here.
Step 4: Insert percentage-based costs
Besides fixed and variable costs, you have to take into account percentage-based variable costs as well when conducting break-even analysis.
Percentage-based costs refer to costs that are calculated as a percentage of revenue, sales, or other financial figures. These can include sales commissions, which sales representatives earn as a proportion of the sales they make, or taxes, which are calculated on the number of units sold, etc.
Step 5: Review the summary table and the pie chart
Once you have provided the data for costs and sale price, you can see the pie chart and the summary table at the top of the template.
The template automatically calculates the break-even point for your business once you have populated the table with the data on costs and sale price. Any changes made in the fixed costs, variable costs, or the sale price will be instantly reflected in the calculations for units and sales.
The pie chart is a simple chart that lets you instantly see if the money you are making is going towards covering costs or generating profit. A bigger cost section will indicate that your costs are too high and you are not yet making any profits.
The Contribution Margin and Contribution Margin Ratio (CMR) are essential metrics that can tell you how much of your sales revenue is available to cover fixed costs and generate profits. For any business, this is useful information, and with this template, you can easily see how much sales revenue is available after covering costs and also pinpoint any high-cost problem areas.
A low ratio will indicate that your variable costs are high, and you manage your expenses better with this kind of financial information.
Step 6: Analyse the break-even table and graph
Now that you have seen the summary calculations, it is time to analyze the data more deeply. For instance, how would different unit sales affect profit/loss? Or how much profit can you make if you exceed the break-even point?
To get such information in your production or sales, the templates feature the break-even table and graph to help you visualize your data more closely.
You will find various columns for adding specific kinds of information:
- Units
- Fixed costs
- Variable Costs
- Total Costs
- Revenue
- Profit/loss
Let us see how you can populate the table.
First, manually insert the number of units that would be produced or sold in the column labeled Units. The template gives you some illustrations with dummy data, such as 0, 610, 915, and so on. You can replace these with the actual values for your business.
Once you have added the number of units, the template will fetch the Fixed Costs, Variable Costs and Total Costs information from the data you added earlier.
Then, the template will automatically calculate Revenue and Profit/Loss amounts in dollars.
- Revenue is calculated when each unit sold is multiplied by the sale price.
- Profit/loss is calculated by subtracting the sale price from the total cost.
The template has provided color-coded solutions, so the loss amounts will appear in red and can be instantly spotted. Once you reach a value where the $Profit/Loss column does not indicate a loss, you will know that any sales/production beyond that point is leading to profits.
With the dummy data presented in the template, production beyond 1695 units will become profitable if the price and costs remain the same.
The corresponding graph in the template gives you a visual view of the break-even point. The section where the two lines intersect (Total costs and Total revenue) is the break-even point and shows the quantity sold or produced on the X-axis and the dollar sales on the Y-axis.
Why Does Break-Even Analysis Matter
There are many reasons you can use this analysis to make thoughtful financial decisions:
- It lets you know exactly at what point you will start making a profit and gives you clarity on when you will start covering your costs.
- This analysis can be a good guide to help you set a price, especially if you are just starting out.
- If you are starting a new business, it will help you plan ahead and know exactly how much you need to sell to make a profit.
- A break-even analysis will show you have done your homework when pitching your business plan to investors. You can show solid calculations behind your plan and engage investors.
- If you are using a dynamic template like this one, break-even analysis will let you see the impact of various variables like costs and sale price on your profit and help you make the right choices.
