Break-even points. What are they? Why do they matter?

A break even point is, quite simply, the point at which the business is making enough in sales to pay for its fixed costs (ie rent, utilities, admin staff) and the variable costs (wages and materials) required to make those sales.

This number, calculated by dividing either the contribution margin per unit (to calculate required sales by unit) or the contribution ratio (to calculate required sales by dollar) by the fixed costs, provides the business owner with an all important base ratio upon which to formulate plans and make decisions.

Take, for example, the small business person who is considering an expansion or large purchase. He will need to understand his base break even point, and understand how much more he will need to sell to pay for the purchase or expansion before he can determine the likelihood of meeting these new levels.

This calculation can also be used when preparing the annual budget to help the business owner aim for a particular profit margin.

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