It's not enough to know how much money in sales you think your business will do each month or year. Whether you're trying to figure out how much start-up money you'll need or the salaries you can afford to pay, you'll need to know when your business will hit the "break-even" point, stop losing money, and start making a profit. A break-even analysis, sometimes called the break-even forecast, is a must-have for your business plan, too. A break-even analysis is a guess, but it's an educated guess. Using a mathematical formula, the breakeven analysis takes your costs and projected profits and determines when your business will start making money. As soon as you gather the financial data you'll need, creating the report is as easy as plugging your data into an online calculator or software and letting it do the math for you. In order to determine your business's break-even analysis, you'll need to know:
- Your fixed costs. Sometimes called overhead, these are the expenses that stay more or less the same from month to month, like rent, utilities, and salaries.
- Sales revenue. This is what you expect to earn through sales each month or year.
- Variable costs. These are the expenses that fluctuate based on sales volume, like supplies, shipping, or commissions.
Action Steps
The best contacts and resources to help you get it done
Download a break-even tool
You can't beat this offer: free advice from the Harvard Business School.
I recommend: Download
Break-Even Analysis Tool, originally developed as a teaching tool for Harvard's MBA program.
Use business planning software
A good business-planning program will help you create the financial reports you need, including a break-even analysis.
I recommend: Business Plan Pro includes many financial-planning features including a break-even analysis generator, and can import your financial figures from QuickBooks.
Try an online calculator
If your mind works best with spreadsheets and graphs, these are solutions for you.
I recommend: JaxWorks offers downloadable Excel files for working figures and an easy-to-use online calculator.
KJE Computer Solutions, Inc offers a free java-based break-even analysis calculator that produces a detailed graphical report.
Tips & Tactics
Helpful advice for making the most of this Guide
- Be realistic. If your projected sales are based on what you think you need to earn to be profitable rather than what the business can actually bring in, your break-even analysis won't be valid.
- If the numbers aren't working out, look at ways to cut costs or consider raising your prices.
- Take a look at the figures after you've been in business a few months and see how your projections stack up to your actual numbers. You will probably have to adjust your break-even analysis at least once every six months.
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