Break Even Point is a fairly simple concept.  Simply defined, it is the unit volume or sales dollars needed in order to cover the fixed costs of a business.  So why do so few people perform this analysis, or keep it updated?

So, how exactly does one determine their break even point?  The formulas are simple:

Variable Contribution Margin:
Sales dollars
Less: Variable Expenses
Equals Variable Contribution Margin
Divided by Sales dollars equals Var CM %

Break Even Sales Dollars:
Total Fixed Expenses
Divided by Var CM%
Break Even Sales Dollars

Break Even Sales in Units:
Break Even Sales dollars
Divided by Average Selling price per Unit
Equals Break Even Sales in Units

In times of turbulence, it is very important to know where your business's break even point is.  When the economy hits the skids (as we found ourselves in the last two years of recession), it is crucial to know where your break even point is.  At what point of sales will I no longer make a profit?  Like wise, in times of improved economic conditions, it is important to know what your variable contribution margin is in order to utilize your excess capacity at profitable margins.  In other words, I want to fill up my capacity so I go out and quote new business at or above my variable CM% and I know I'll still make money while utilizing my machine capacity.

So, when times are good or when times are bad, you still need to keep an eye on your break even point.  Do you know what your break even point is?