If you’re like many new entrepreneurs, you know your industry inside and out. It’s the bookkeeping and finance end of running a business that’s tricky.

While your accountant may produce a bevy of ledger statements and financial analytics for you, break-even sales figures may be one of the most basic, and helpful for long-range planning, figures for planning your business’ course of action.

## Break-Even Analysis 101

The concept behind break-even sales dollar analysis is relatively simple: It’s the point when your sales reach a volume at which producing them becomes profitable. At the break-even point, your company recovers its investment in production and begins turning a profit with each additional sale.

Break-even analysis considers fixed costs of production, such as rent and salaries, as well as variable costs, such as hourly labor, cost of materials, marketing, sales commissions, shipping and other costs that aren’t set.

## Calculating Break-Even Quantity

Calculating the break-even point helps predict the volume of sales your company will need to achieve to begin turning a profit. Calculating the break-even quantity is a simple matter of subtracting the variable per-unit production costs from the average price per unit sold, then dividing fixed costs by that figure.

Expressed as an equation the break-even calculation is:

Break-Even Quantity = fixed costs/(average price per unit – variable costs per unit)

For example, a company that charges $45 per widget, with variable costs of $23 per piece and fixed costs of $100,000, would need to sell 4,546 widgets to start turning a profit:

Break-Even Quantity = $100,000/($45 - $23)

## Calculating Break-Even Sales Dollars

If you’d rather calculate the amount of sales your company needs to reach the break-even point rather than determining it on a per-piece volume basis, you can determine that even more easily.

First, calculate your profit margin per piece by subtracting variable costs from its price and dividing that figure by the unit price.

After determining your profit margin, divide fixed expenses by the profit margin to calculate break-even sales figures.

Expressed mathematically, that calculation is:

Break-Even Sales Dollars = Fixed Costs/(Fixed Expenses/Profit Margin)

Continuing the widget company example, it has a profit margin of 49 percent per unit, or $45 divided by ($45 - $23), so its break-even sales dollar figure is $204,081.

Break-Even Sales Dollars = $100,000/0.49

## Applications and Shortcomings of Break-Even Calculations

Many business owners use break-even figures to calculate optimal costs in variable expenses, such as determining commission rates, wages and marketing costs, by calculating different break-even points as the impact in profitability that each variable cost that entrepreneurs can control – as opposed to cost of materials, shipping and other outside costs – can be analyzed individually.

Break-even analysis requires the ability to determine the variable costs per unit with accuracy, which can be very difficult for companies that deal with many different variables in delivering their product or service.

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Writer Bio

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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