Breakeven Analysis

Breakeven Analysis

breakeven analysisAccording to Webster’s Dictionary, the breakeven point is defined as “the point at which cost and income are equal and there is neither profit nor loss“.  The purpose of breakeven analysis is to determine the point at which revenue received equals the costs associated with receiving the revenue.  Simply put, how much revenue we need to earn to cover our costs.

Breakeven Analysis

Situations that call for a breakeven analysis can include:

Start-Ups and New Ventures

The most common use of breakeven analysis is when considering starting a new business or whether to develop a new product or service.  The limitation of breakeven analysis for a new venture is that it doesn’t take into account how demand may be affected at different price levels.

Breakeven Analysis in Pricing

As outlined above, most companies perform a breakeven analysis in pricing when rolling out a new product or service.  However, it’s important to periodically revisit the analysis to determine whether conditions have changed.  For example, if demand for a product has increased, then it may be possible to reach the breakeven point sooner if the price of the product is increased.

In Times of Trouble…

When business is booming, it’s easy to lose control of costs. This is because the volume of sales is more than enough to cover them.  When things start to head south, revisit your breakeven analysis to ensure that prices are set correctly. Only direct resources towards profitable sales.  Calculating the breakeven point by product, customer, or region can help highlight areas where you can make improvements.  Often, it’s possible to convert some fixed costs to variable costs in order to keep costs in line with volume.
To learn how to prepare a breakeven analysis, check out this article on wikicfo. If you also want to learn how to price for profit, then download our Pricing for Profit Inspection Guide.
breakeven analysis, breakeven analysis in pricing
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
breakeven analysis, breakeven analysis in pricing

ARTICLES YOU MIGHT LIKE

Financial Ratios

See also: Quick Ratio Analysis Price to Book Value Analysis Price Earnings Growth Ratio Analysis Time Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The

Read More »

Margin vs Markup

See Also: Gross Profit Margin Analysis Retail Markup Chart of Accounts (COA) Margin Percentage Calculation Markup Percentage Calculation Margin vs Markup Differences Is there a difference between margin vs markup? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace

Read More »

Markup Percentage Calculation

See Also: Margin vs Markup Margin Percentage Calculation Retail Markup Gross Profit Margin Ratio Analysis Operating Profit Margin Ratio Analysis Markup Percentage Definition Define the markup percentage as the increase on the cost price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

September 12-15th 2022

Days
Hours
Min
SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ WORKSHOP SERIES

Strategic CFO™ Financial Leadership Workshop
The Art Of The CFO®

Days
Hours
Min

December 5-8th, 2022