MileIQ: Mileage Tracker & Log

MileIQ Inc.

GET — On the App Store

View
MileIQPricing
Open MenuClose Menu
Small Business Tips

How small business calculates break-even point

Manasa Reddigari
May 8, 2019

Download MileIQ to start tracking your drives

Automatic, accurate mileage reports.

Get Started

Is your small business in the red, profitable, or perhaps somewhere in between? Whatever the financial status of your business venture today, the break-even point can help you improve upon it in the future.

Continue reading to learn the definition of the term and how to calculate the break-even point.

What's a break-even point?

You might have heard the term "breaking even" used in personal finance to describe a point at which your expenses and income are equal. The term "break-even point" has a similar meaning in business accounting.

The break-even point refers to the point at which total revenue equals total cost. When a business has reached that point for a product or project, it has generated the product or project sales volume needed to cover both the fixed and variable costs of the business during a certain period of time.

The business incurs neither a profit nor a loss at the point of breaking even. The good news? This means your business did not spend more money than it pulled in for a venture. The bad news is that it did not make gains, either.

Why should small businesses know their break-even point?

Calculating the break-even point, a process sometimes undertaken as part of a larger financial analysis, is useful for multiple reasons:

  • It tells you how many units of a business offering you need to sell to avoid losses.
  • It helps you forecast when you will turn a profit.
  • Fixed and variable costs are identified and controlled.
  • It helps you identify whether or not your per-unit selling price needs adjustment.
  • It helps you assess your margin of safety. This figure amounts to actual sales minus break-even sales, which tells you much sales could still fall before a venture turns unprofitable).
  • The viability and risk of a venture before undertaking it is assessed.
  • It can easily and quickly be calculated.

Download MileIQ to start tracking your drives

Automatic, accurate mileage reports.

Get Started

How to calculate a break-even point

You can calculate the break-even point either in terms of units or sales dollars.

The formula based on units is:

Break-Even Point (in units) = Fixed Costs √∑ Contribution Margin

  • Contribution Margin = Per-Unit Sales Price - Variable Costs
  • Fixed costs are those that don't change as sales volume changes (e.g., insurance or rent)
  • Variable costs change based on sales volume (e.g., labor, material and manufacturing costs)

Let's take a look at an example. MileHigh Inc. wants to calculate its break-even point for a new widget. It estimates its fixed costs at $10,000, variable costs at $1.00 per unit of product and assigns a per-unit sales price of $5.00.

We can calculate the break-even point in units as follows:

$10,000 √∑ ($5.00 - $1.00)

$10,000 √∑ $4.00 = 2,500 units

Therefore, MileHigh Inc. needs to sell 2,500 widgets to cover its fixed and variable costs.

The break-even formula based on sales dollars is:

Break-Even Point (sales in dollars) = Fixed Costs √∑ Contribution Margin Ratio

where

Contribution Margin Ratio = Contribution Margin √∑ Per-Unit Sales Price

Using the same example above, we can calculate the break-even point in sales dollars as follows:

$10,000 √∑ ($4.00 / $5.00)

$10,000 √∑ $0.80 = $12,500

Therefore, MileHigh needs to sell $12,500 worth of widgets to cover its fixed and variable costs. As you might have noted, making $12,500 is the equivalent of selling 2,500 widgets as noted above. So while they use different variables, both formulas can be used to reach a similar conclusion about the financial prospects of a business venture.

Still tracking miles by hand?

Use MileIQ to automatically keep a full, IRS friendly mileage log.

Get Started

Related Blog Posts

Self Employed

Freelance taxes: What to know for your first time filing

Paying freelance taxes for the first time? Don't sweat it. Here are easy-to-follow tips that will prepare you for tax season.

Self Employed

How To Write Off MileIQ On Your Taxes

MileIQ is a great way to automatically track your business drives for the largest mileage deduction you deserve. But, did you know you can also write off MileIQ on your taxes?

Small Business Tips

How to calculate profit margin - formula & tips

Here's how to calculate profit margin for your business. Product margin and profit margin are key for keeping your finances in line.

Taxes

Taxes for sole proprietorship vs tax classification for LLC

A sole proprietor vs LLC for you small business faces different taxes. Learn about the pros and cons of each legal entity for your business.

Small Business Tips

Starting a Business With Little or No Money

Starting a business with little or no money is possible but requires overcoming some unique challenges. Here are some helpful tips.

Small Business Tips

Do you need liability insurance for your small business?

You know you need to protect your assets. Forming a legal entity gives your business limited protection. Most businesses also need insurance. Most small businesses need liability insurance. What is the best liability insurance for your small business? The best insurance protects your business and personal assets. Risks can stop your small business from running

MileIQ: Mileage Tracker & Log

MileIQ Inc.

GET — On the App Store

View
MileIQPricing
Open MenuClose Menu

Is your small business in the red, profitable, or perhaps somewhere in between? Whatever the financial status of your business venture today, the break-even point can help you improve upon it in the future.

Continue reading to learn the definition of the term and how to calculate the break-even point.

What's a break-even point?

You might have heard the term "breaking even" used in personal finance to describe a point at which your expenses and income are equal. The term "break-even point" has a similar meaning in business accounting.

The break-even point refers to the point at which total revenue equals total cost. When a business has reached that point for a product or project, it has generated the product or project sales volume needed to cover both the fixed and variable costs of the business during a certain period of time.

The business incurs neither a profit nor a loss at the point of breaking even. The good news? This means your business did not spend more money than it pulled in for a venture. The bad news is that it did not make gains, either.

Why should small businesses know their break-even point?

Calculating the break-even point, a process sometimes undertaken as part of a larger financial analysis, is useful for multiple reasons:

  • It tells you how many units of a business offering you need to sell to avoid losses.
  • It helps you forecast when you will turn a profit.
  • Fixed and variable costs are identified and controlled.
  • It helps you identify whether or not your per-unit selling price needs adjustment.
  • It helps you assess your margin of safety. This figure amounts to actual sales minus break-even sales, which tells you much sales could still fall before a venture turns unprofitable).
  • The viability and risk of a venture before undertaking it is assessed.
  • It can easily and quickly be calculated.

How to calculate a break-even point

You can calculate the break-even point either in terms of units or sales dollars.

The formula based on units is:

Break-Even Point (in units) = Fixed Costs √∑ Contribution Margin

  • Contribution Margin = Per-Unit Sales Price - Variable Costs
  • Fixed costs are those that don't change as sales volume changes (e.g., insurance or rent)
  • Variable costs change based on sales volume (e.g., labor, material and manufacturing costs)

Let's take a look at an example. MileHigh Inc. wants to calculate its break-even point for a new widget. It estimates its fixed costs at $10,000, variable costs at $1.00 per unit of product and assigns a per-unit sales price of $5.00.

We can calculate the break-even point in units as follows:

$10,000 √∑ ($5.00 - $1.00)

$10,000 √∑ $4.00 = 2,500 units

Therefore, MileHigh Inc. needs to sell 2,500 widgets to cover its fixed and variable costs.

The break-even formula based on sales dollars is:

Break-Even Point (sales in dollars) = Fixed Costs √∑ Contribution Margin Ratio

where

Contribution Margin Ratio = Contribution Margin √∑ Per-Unit Sales Price

Using the same example above, we can calculate the break-even point in sales dollars as follows:

$10,000 √∑ ($4.00 / $5.00)

$10,000 √∑ $0.80 = $12,500

Therefore, MileHigh needs to sell $12,500 worth of widgets to cover its fixed and variable costs. As you might have noted, making $12,500 is the equivalent of selling 2,500 widgets as noted above. So while they use different variables, both formulas can be used to reach a similar conclusion about the financial prospects of a business venture.

Get started for free