Break Even Analysis
A break-even analysis is a useful tool for determining at what point your company, or a new product or service, will be profitable.
Put another way, it’s a financial calculation used to determine the number of products or services you need to sell to at least cover your costs. When you’ve broken even, you are neither losing money nor making money, but all your costs have been covered.
For example, a break-even analysis could help you determine how many widgets you need to sell to cover your warehousing costs. Or how many hours of service you need to sell to pay for your office space. Anything you sell beyond your break-even point will add profit.
There are a few definitions you need to know in order to understand break-even analysis.
Fixed Costs: Expenses that stay the same no matter how much you sell.
Variable Costs: Expenses that fluctuate up and down with sales.