Break-Even Analysis Guide: How to Calculate BEP and Apply It to Your Business

Break-Even Analysis Guide: How to Calculate BEP and Apply It to Your Business
A break-even analysis can help you determine fixed and variable costs, set prices and plan for your business's financial future.
by Colleen Egan Jun 03, 2021 — 4 min read
Break-Even Analysis Guide: How to Calculate BEP and Apply It to Your Business

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When will I break even? It’s one of the biggest questions you’ll ask yourself when starting and running a small business. Breaking even is a healthy sign of growth and can be the difference between success and failure, hence the importance of conducting a break-even analysis. This will help you determine fixed costs (like rent) and variable costs (like materials) so you can set your prices appropriately and forecast when your business will reach profitability. Central to the break-even analysis is the concept of the break-even point (BEP).

What is the break-even point for a business?

A business’s break-even point is the stage at which its revenue equalises with its costs. Once you determine that figure, you can take a hard look at all your costs — from rent and labour, to materials — as well as your pricing structure.

You can then then ask yourself these questions:

 

Calculating your break-even point

There are two basic formulas for determining a business’s break-even point. One is based on the number of units of products sold. The other is based on points on sales in GBP.

To better explain what all of this means, let’s look at a break down of the formula components:

 

How to use a break-even analysis

A break-even analysis enables you to determine your break-even point. But this isn’t the end of your calculations.

After crunching the numbers, you need to ask yourself whether your current plan is realistic or if you need to raise prices, cut costs or both. You should also consider whether your products will be successful in the market. Although the break-even analysis determines the number of products you need to sell, there’s no guarantee you’ll hit that number.

You should ideally conduct this analysis before you start a business so you have a good idea of the risk involved. But if you’re an existing business, conduct this analysis before launching a new product or service to determine whether or not the potential profit is worth the startup cost.

A break-even analysis isn’t just useful for startup planning. Here are some ways that businesses can use it in their daily operations and planning.

 

Every small business owner dreams of break-even point and what comes beyond. The good news is that you don’t have to wait around and speculate. Using a break-even analysis, you can project when and how you’ll reach break-even point. This in turn will enable you to stop dreaming and start taking measures to make sure you get there.

Colleen Egan
Colleen Egan writes for Square, where she covers everything from how aspiring entrepreneurs can turn their passion into a career to the best marketing strategies for small businesses who are ready to take their enterprise to the next level.

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