The determination of the break-even point is one of the most critical exercises when preparing a business plan. It gives you a rough estimate of the minimum amount of effort needed to make your venture successful.

The break-even point of a company or a project is the number of units that you must sell to make the total revenue equal the total cost. At this point, you make neither a profit nor a loss. If however you sell more than the BEP volume, you are bound to make a profit and if you sell less, you will automatically make a loss.

Calculating a company’s break-even point is not a hard task in any way; you just need to get hold of three elements:

1. The price at which you will be selling one unit of your product. Regardless of the product or service you are selling, it is possible to break it down into units. If it is a product, you can measure it in terms of liters, kilograms and so on. If you are selling a service, you can measure it in terms of hours, events, etc.

2. Fixed costs; these are costs that do not vary with output. Fixed costs will be there regardless of whether you are producing. For example, if you have a newly designed website that you want to use to sell your products, web hosting fees are constant whether you sell anything or you do not.  

3. Variable costs: These costs vary with sales. They include items such as the cost of raw materials, direct labor, etc.
Once you can point out these three elements, you are now ready to work out the BEP.

You get the BEP by dividing the total fixed costs by the contribution.
i.e.,

 Break Even point = Fixed costs/Contribution

Price – Variable costs, gives contribution.

As you can see, once you have covered the variable costs, the extra revenue contributes to paying up for the fixed costs. This means that even if you are making a loss, you should continue operating the business as long as you are covering the variable costs. If you stop operating, you will still pay for the fixed costs and that means that you will face a bigger loss. However, if you cannot meet your variable costs, then the best thing would be to stop production (if it is a short-term problem) or to shut down all together if it is a long term-problem.