A Break-Even Analysis

A break-even analysis indicates the amount the firm has to make to cover all of its costs of doing business.

A break-even analysis considers:

> How much is the typical sale.

> The cost to produce the typical sale.

> Annual fixed costs such as rent, salaries, rent, lease, warehousing (if renting),

utilities.

Break-even price calculation:

Fixed costs/(1-average cost of products/average price of products)

A break-even analysis proves essential to businesses because it shows the cost of producing its goods or providing the necessary services to the firm's current, and potential clients with a return on investment equal to the cost of production. It is the line on which the total cost and total revenue are equal...no net loss or gain.

A break-even analysis should be done in the various companies (small, medium, large or mega) to track the financial health of the organization, and more important, its viability and growth in the global marketplace. A firm must continually conduct business with a high profit to remain successful and spread its wings into known, and unknown territory.

In the event an organization's total cost and total revenue remain equal, there will be no opportunity for growth as the firm will not be reaping profit from its business initiative. It also means corporate management are not striving to seek out new business avenues to add revenue streams. This will not resonate well with investors, shareholders, and stakeholders, and more so, reduce the opportunity for potential investors.

Entrepreneurs must also remain cognizant of a break-even analysis, and more so, the calculation so the owners' can operate and manage the company with success in mind.