How a Break-Even Analysis Can Help Your Small Business Strategy

How a Break-Even Analysis Can Help Your Small Business Strategy
Updated June 01, 2023
Julie Bawden-Davis
Written byJulie Bawden-Davis
Zachary Ace Aiuppa
Edited byZachary Ace Aiuppa
Share this guide

At first glance, merely breaking even may not seem like much of a business accomplishment, but it's a benchmark worth noting. For the beginning small business owner, your break-even point provides you with vital information about how your company is doing. When you break even, you're not making or losing money, but your costs are covered.

A break-even point is when what you're earning covers your production spending. Your revenue covers the labor, materials, and direct costs of creating your product. Your break-even point provides you with vital information to plan long-term strategy, including what you need to earn to make a profit. You can obtain this information with a break-even analysis.

What Is a Break-Even Analysis?

A break-even analysis provides you with the information you require to earn back your initial investment. It's a useful tool to determine when your business will be profitable. This information will inform you how much of your products and services you need to create and sell to cover your costs.

Finding your break-even point lets you know how many of your products you need to sell to pay for the materials required to make them. You might find that you need to move a lot more than you thought before covering costs. This gives you the opportunity to review your business model closely. Maybe you need to charge more or cut production costs to make a profit in the future.

Break-Even Analysis Formula

There is a formula used to calculate your break-even point. To understand the formula, it helps to know a couple of terms.

Fixed Costs

Fixed costs are expenses that remain the same month to month, regardless of how much you sell. Examples include insurance, rent, utilities, and administrative assistance costs.

Variable Costs

Variable costs are expenses that fluctuate along with sales. These can include labor, commissions, raw materials, and shipping.

The Formula

To find your break-even point, subtract your per-unit variable costs from your per-unit selling price. Divide your fixed costs by this number. That will tell you how many units you need to sell to break even.

Fixed Costs / (Average Price — Variable Costs) = Break-Even Point

We'll run through an example. Let's say you sell Wonder Widgets for $5 each. Your fixed costs are $2,000 for the month, and it costs $1 to produce each widget.

  • Fixed Costs = $2,000

  • Variable Costs = $1 per widget

  • Sales Price = $5 per widget

The formula would look like this:

$2000 ÷ ($5 - $1)

or $2000 / $4

That equals 500, meaning you would need to sell 500 Wonder Widgets that month to break even. If you move less than that, you're losing money. Sell more and you're making a profit.  

Why a Break-Even Analysis Is Important

Knowing your break-even point can help you improve your business. After running the numbers, you may find that you need to make adjustments. A break-even analysis helps you set your budget, monitor and control costs, decide pricing strategy, and even motivate your employees.

When you look closely at your break-even analysis, you may find that you need to sell many more products than you currently are to break even. This is a good time to ask yourself if your current business plan is solid or faulty. You might need to raise prices, cut costs, or both.

When to Conduct a Break-Even Analysis

Ideally, it would be good to conduct a break-even analysis before you even start your business. That will give you a good idea of how much risk you are going up against. It's much easier to make some tweaks to your business plan at that early stage.

If you run an existing business, it's advisable to conduct a break-even analysis before launching a new product or service. This will let you know if the potential profit is worth the costs.

A break-even analysis is also a good idea if you add a new sales channel, such as expanding to selling online. The sales figures and costs will be different for an online sales channel than in a brick-and-mortar location. You'll want to make sure that your online venture will also break even. If it doesn't, the losses could put your entire business in jeopardy.

Additionally, it's prudent to conduct a break-even analysis when you change your business model. Small adjustments in how you run things can have a big effect on whether your company is making money.

How Conducting a Break-Even Analysis Benefits Your Business

Here are several ways that conducting a break-even analysis can benefit an existing business.


Your analysis could show that your current pricing structure is too low to enable your company to break even. This gives you the opportunity to raise prices. But before you bust out the pricing gun, do some research on what your competitors are charging so that you don't price yourself out of the market.

New Products

New product launches are usually a time of much excitement for a business. Don't let that excitement blind you to possible issues. A break-even analysis before launching can let you know if your new product, along with its new promotion and design costs, is truly a good idea for your business.

Materials and Labor

If you haven't broken even yet, it could be that the cost of your materials and labor is too high. This makes your business model unsustainable. If this is the case, research ideas for lowering costs while maintaining the quality of products and services.


Knowing exactly how much your company needs in terms of revenue helps you plan for reaching your business goals. This can help to motivate you and your employees. For example, if you wish to move into a larger office building, a break-even analysis lets you know how much you need to sell to make that worth it.

Break-Even Analysis Limitations

Like all business planning tools, a break-even analysis can only go so far. Here are several limitations:

Won't Predict Demand

Demand fluctuates. A break-even analysis can tell you what your sales have been, but it can't tell you what your sales will be. You will only learn how many units of your product you need to sell to break even.

Requires Reliable Data

The concept "garbage in, garbage out" applies to a breakdown analysis. The data you provide must be reliable. Ensure that all calculations are correct by double and even triple-checking your data before plugging it into the equation.

Provides a Limited View

A break-even analysis gives you an overarching look at your business. It isn't going to pick up on the specifics and nuances of running a profitable business.

Only Looks at the Present

The break-even analysis doesn't take the future into account. You will see only present trends. That means if costs rise considerably for the materials to make your products in the future, your company may no longer be in break-even status.

Doesn't Account for Competitors

Your business will affect your competitors' business. If you're already struggling, the last thing you need is a price war. This kind of activity could severely disrupt your break-even point.

A Useful Tool

Despite the limitations, a break-even analysis is an essential skill for every small business owner. It helps you make smart, informed decisions and take the right steps to ensure your business stays profitable. Whether you're running the world's largest Wonder Widget warehouse or hawking handmade handkerchiefs on Etsy, a break-even analysis is a handy tool in your small business bag of tricks.

A break-even analysis for your business gives you a solid understanding of your business's baseline conditions, which helps you be successful. To learn more about what you can do to increase your business's chances of success, visit Swyft Filings' Learning Center.

Originally published on October 24, 2022, and last edited on June 01, 2023.

Frequently Asked Questions

Looking for answers? You came to the right place. To learn more about our company mission and culture, click the link below.

Life at Swyft
How much does it cost to form a corporation or LLC?

You can form a corporation or LLC with our help for as little as $0, plus state filing fees for incorporation. Filing fees vary depending on the state you incorporate in. For more information on specific states, check out our state guides on the Swyft Resource Center. You can also email us with specific questions or contact us at 877-777-0450.

What payment methods do you accept?

Swyft Filings accepts payment through Visa, MasterCard, American Express, PayPal, checks, and money orders. You can send any questions about payment to our email address or contact us at 877-777-0450.

Will I have to pay additional fees to Swyft Filings after completing my order?

It depends on what you ordered. If all you did was file your corporation or LLC, the price you paid when ordering is all you pay. You will have no further fees after that.

However, if you signed up for the Swyft Filings Registered Agent Service, you will be charged its initial fee three days after you place your order. From then on, you will be charged according to the terms of your subscription until you change your registered agent with the state or dissolve your company. If you change your agent or dissolve your company on your own, let us know so we can discontinue billing.

Other potential subscription-based options include SnapMailbox, 360 Legal Forms, and ComplianceGuard. If you opt for SnapMailbox or 360 Legal Forms, you will be charged a monthly fee after their respective 30-day free trials end. ComplianceGuard has an annual fee after a 14-day free trial. All three of these services are completely optional.

When will my order be processed?

Our team processes all Standard orders on a first come, first served basis. If you opt for Express or Same-Day Processing, we prioritize your order and send it to the front of the line. However, no matter how fast we get it out the door, you’ll still have to wait for your state to address your filing.

Swyft Blog

Everything you need to know about starting your business.

Each and every one of our customers is assigned a personal Business Specialist. You have their direct phone number and email. Have questions? Just call your personal Business Specialist. No need to wait in a pool of phone calls.

Woman in room with flowers in vases.
Preparing to Launch

5 LegalZoom Alternatives for Entrepreneurs

If you’ve considered forming a Limited Liability Company (LLC), corporation, or nonprofit, you’ve probably heard of LegalZoom. This service has helped entrepreneurs with business formation since 2001.
Coffee Shop Owner on Computer
Preparing to Launch

Northwest Registered Agent vs. LegalZoom

Our Northwest Registered Agent vs. LegalZoom comparison reviews each service’s formation time, customer service, and offerings so you make an informed choice.
Nonprofit Spotlight: Bailey's Bookworms' Mission of Literacy
Managing Your Business

Nonprofit Spotlight: Bailey's Bookworms' Mission of Literacy

Swyft Filings is a business formation service that automates the filing process for entrepreneurs, making it easier to get their LLC, C corp, S corp, or nonprofit off the ground. Since 2015, we've helped over 300,000 businesses incorporate.
Blog Card Image
Managing Your Business

What's an Apostille?

Swyft Filings is a business formation service that automates the filing process for entrepreneurs, making it easier to get their LLC, C corp, S corp, or nonprofit off the ground. Since 2015, we've helped over 300,000 businesses incorporate.
zenbusiness vs legalzoom - Swyft Filings

ZenBusiness vs. LegalZoom: Comparing LLC Formation Services

Our ZenBusiness vs. LegalZoom comparison reviews each service’s formation time, customer service, and other features so you make an informed choice.
Setting Up Business Credit
Managing Your Business

How to Get an EIN to Open a Business Bank Account

In most cases, you need an employer identification number to open a business bank account. Follow these steps to get an EIN for your business banking needs

Do what you love. We'll handle the paperwork.

Trusted by over 250,000 businesses since 2015. Start your business with confidence. Affordable. Fast. Simple.

Incorporate now
Dummy Switchback Image