What a Break-Even Analysis Tells You

A break-even analysis shows you the amount of revenue you'll need to bring in to cover your expenses, before you make even a dime of profit. If you can attain and surpass your break-even point -- that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses -- then your business stands a good chance of making money.

How to Prepare a Break-Even Analysis

To perform a break-even analysis, you'll have to make educated guesses about your expenses and revenues. You should do some serious research -- including an analysis of your market -- to determine your projected sales volume and your anticipated expenses. Business plan books and software can teach you how to make reasonable revenue and cost estimates.

You'll need to make the following estimates and calculations:

• Fixed costs. Fixed costs (sometimes called "overhead") don't vary much from month to month. They include rent, insurance, utilities, and other set expenses. It's also a good idea to throw a little extra, say 10%, into your break-even analysis to cover miscellaneous expenses that you can't predict.
  
  
• Sales revenue. This is the total dollars from sales activity that you bring into your business each month or year. To perform a valid break-even analysis, you must base your forecast on the volume of business you really expect -- not on how much you need to make a good profit.
  
  
• Average gross profit for each sale. Average gross profit is the money left from each sales dollar after paying the direct costs of a sale. (Direct costs are what you pay to provide your product or service.) For example, if Antoinette pays an average of $100 for goods to make dresses that she sells for an average of $300, her average gross profit is $200.
  
  
• Average gross profit percentage. This percentage tells you how much of each dollar of sales income is gross profit. To calculate your average gross profit percentage, divide your average gross profit figure by the average selling price. For example, if Antoinette makes an average gross profit of $200 on dresses that she sells for an average of $300, her gross profit percentage is 66.7% ($200 divided by $300).