Utah State

Break-Even Analysis

Downloads & Links

 

Break-Even Analysis (Excel)

(Choose "Save File" to make editable)

 

The first step in a feasibility study is to calculate a break-even point. The formual is...

Total Fixed Expenses / (Price-Cost) = Break-Even Point

Where Total Fixed Expenses is the total of all expenses you are going to have to pay whether you do any business or not. Some examples include (but are not limited to) Salary, payroll expense (about 35% of salary), rent, insurance, utilities, etc. Price is the average amount of a customer's purchase. Cost is the cost to provide what the customer bought. If you are selling a tangible item it may include raw materials and labor or the wholesale cost. If you are providing a service it would be the labor cost per customer.

You can use the spreadsheet to the right of this page. It is in Excel format but you can also use Open Office to access the file. Open office can be downloaded for free at the Apache Open Office website. Do this analysis for a single month but, keep in mind that this will be an average. If you are starting a business that caters to tourists and you won't have income for 9 months of the year or if you are in a retail operation that does 80% of it's business during Christmas, a monthly break-even number won't be as helpful.

If you want a break-even number for a day, a week, a month or a year simply use total fixed expenses for that time period.

One more step. Now that you have done the calculation for a break-even point, you know how much business you have to do to break-even. Do the same calculation but, instead of using only total fixed expenses, use total fixed expenses plus the expected loan payment plus the amount of profit you need to have to make this project worthwhile. Remember that you will lose about 1/3 of your profit on average to income taxes so remember you are looking at gross income not take home pay. Do this additional step and you will see how much business you need to do to get what you want.

Hint: with a little algebra you can work the equation above around to solve for any component (total fixed expenses, price, cost or break-even point) if you know the other components. If you need help with this contact the SBDC.