Every business, large or small, needs to have a solid understanding of its finances in order to thrive. One of the most important concepts to grasp is the break even point. Simply put, the break even point tells you how much revenue you need to generate to cover all of your business’s costs. Knowing this figure is crucial for managing pricing strategies, understanding profitability, and making sound financial decisions.
In this article, we’ll take a closer look at what the break even point is, why it’s important, and how you can calculate it accurately.
Break Even Point Calculator
For many business owners, calculating the break even point manually can seem like a daunting task, especially if you’re not familiar with finance. Luckily, there are many online tools available — known as break even point calculators — that can do the math for you. These tools automate the process, allowing you to enter your costs and pricing information, and then instantly calculate your break even point.
A break even point calculator takes the same formula and simplifies it. Rather than spending time crunching numbers, you can input your fixed and variable costs, and the calculator will provide the result within seconds. This is especially helpful for businesses that regularly need to track their financials and test different scenarios.
What is the Break Even Point?
The break even point (BEP) is the level of sales at which your business’s total revenue exactly equals its total costs, meaning you are neither making a profit nor incurring a loss. It’s the point at which your business is “breaking even” — covering its costs but not yet making any money beyond that.
For example, if you’re selling a product, the break even point shows you how many units need to be sold before the business starts to turn a profit. This is a vital figure for entrepreneurs and business owners to understand, as it helps with planning, budgeting, and setting sales goals.
How Do You Calculate the Break Even Point?
Now that we’ve covered what the break even point is, let’s talk about how to calculate it. The formula is quite straightforward:
Break Even Point (in revenue) = Fixed Costs ÷ Contribution Margin Ratio
Where:
Contribution Margin Ratio = (Selling Price per Unit – Variable Cost per Unit) ÷ Selling Price per Unit
Let’s break this down:
- Fixed Costs are the total of all your business’s fixed expenses.
- Selling Price per Unit is the amount of money you charge for one unit of your product or service.
- Variable Cost per Unit is the cost it takes to produce one unit of your product, including materials and direct labour.
Example:
Let’s say you own a small business that sells handmade candles. Here’s how to calculate your break even point:
- Fixed costs: £12,000 (e.g., rent, utilities, insurance)
- Selling price per candle: £20
- Variable cost per candle: £8 (e.g., wax, wick, labour)
This means you need to sell 1,000 candles just to cover your costs. Any candles sold beyond that 1,000 mark will start to generate a profit.
