BREAK-EVEN  ANALYSIS INSTRUCTIONS

WHAT IS A BREAK-EVEN POINT?  
This is the point at which a company's costs exactly match the sales volume and at which the business has neither made a profit nor incurred a loss.  The break-even point can be determined by mathematical calculation or by development of a graph. It can be expressed in: 
Total Dollars of Revenue (exactly offset by total costs) 
-or- 
Total Units of Production (cost of is exactly equal to the income derived by their sale).
		
To apply a Break-Even Analysis to an operation, you will need three projections:  
1.	Fixed Costs:  (Administrative Overhead + Interest, etc.)  Many of these costs remain constant even during slow periods. Interest expense must be added to fixed costs for a break-even analysis.
2.	Variable Costs (Cost of Goods + Selling Expenses).  Usually varies. The greater the sales volume, the higher the cost.
3.	Total Sales Volume (Projected sales for same period).

SOURCE OF INFORMATION  
All of your figures can be derived from your Three Year Projection. By now you should be able to see that each financial document in your business plan builds on the ones done previously. Retrieve the figures and plug them into the following mathematical formula. 
Important:  In order for you to either calculate or graph your break-even point, you will find that period of time in which your total revenues exceed your total expenses.  You may not reach break-even point in the first year. If you projected a net loss for Year 1, combine your figures with Year 2 (or Year 3, if necessary), until your total revenues are greater than your total expenses. Also, in order to stay on the graph when you plot your break-even point, set the value for each square in terms of thousands, ten thousands, or hundreds or thousands of dollars. (Fill in your values in the line under ”Dollars Sales Volume“ on the graph.
			
MATHEMATICALLY: A firm's sales at break-even point can be computed by using this formula:
	B-E Point (Sales) = Fixed Costs + [(Variable Costs/Estimated Revenues) x Sales]
	Terms Used:	a. Sales = volume of sales at Break-Even Point
			b. Fixed Costs = administrative expense, depreciation, interest
			c. Variable Costs = cost of goods and selling expenses
			d. Estimated Revenues = income (from sales of goods/services)
	Example:	a. S (Sales at B-E Point) = the unknown 
			b. FC (Fixed Costs) = $25,000
			c. VC (Variable Costs) = $45,000
			d. R (Estimated Revenues) = $90,000 
	Using the formula, the computation would appear as follows:
			S (at B-E Point) = $25,000 + [($45,000/$90,000) x S]
			S = $25,000 + (1/2 x S)
			S - 1/2 S = $25,000
			S = $50,000   (Break-Even Point in terms of dollars of revenue  exactly  offset by total costs)
GRAPHICALLY
Break-even point can also be plotted in graph form.  You will be required to draw three lines representing the three projections mentioned above. The point at which two of the lines cross will represent the break-even point projected for your business. The graph is sometimes less formidable to deal with than the math method.  It also makes a nice visual statement in your business plan. 

AUTOMATE YOUR BUSINESS PLAN  HAS A SPREADSHEET
To make it easy for you to complete your own Break-Even Analysis, there is a pre-formatted spreadsheet in which you can plot the lines on a graph and also mathematically calculate your break-even point.

COMPLETE THE SPREADSHEET IN THE FOLLOWING ORDER
1.	Retrieve the totals for the three projections from your Three-Year Projected Income Statement. Input the numbers in the line below the formula in your spreadsheet.  Then input those same numbers in the right hand column of  the boxed area at the bottom of the spreadsheet.  The Break-Even Point will be automatically calculated in the lower right-hand cell in the box.
2.	Complete the graph at the top of the spreadsheet according to instructions below.  You may either use the line drawing tools within the spreadsheet program or print out your spreadsheet at this point and draw the lines by hand (whichever makes you feel most comfortable).

INSTRUCTIONS FOR COMPLETING YOUR GRAPH 
 
DETERMINE THE FOLLOWING PROJECTIONS:
1.   Fixed Costs + Interest to be Paid Out for Period:  Administrative costs, many of which will remain constant and must be met regardless of your sales volume. (rent, insurance, utilities, depreciation, office salaries, etc.)  Interest expenses must also be included for purposes of a break-even analysis.  In Example Spreadsheet : $20,654
2.   Variable Costs - Cost associated with the production and selling of your products  or services.  If you have a product,   you will include cost of goods (inventory  purchases, labor, materials) with your variable costs (freight, packaging, sales commissions, advertising, etc.)   If you wish to use the unit production break-even method, cost of  goods  may be expressed by multiplying the unit cost by the units to be sold for a product. Example:  $1.50 per unit  x  20,000 units  +  $3,456  selling  expenses  =  $33,456   For a  service having no cost of goods, use  total of  your projected  variable (selling) expenses.  Figures for cost of goods and variable expense totals come from your three-year income projection.
3.   Total Sales Volume:  This is the figure representing your total projected revenues. Draw the net sales figures from your   three-year income projection. You may also calculate revenues by multiplying projected units of product to be sold x sale price per unit.  Example: 30,000 units  @ $3  +  5,000  units  @  $1   = $95,000.  If you are a service business and bill by the hour, you can multiply your billable hours x  your hourly rate.  Example: 950 hours  x $100  =  $95,000)  
			
DRAW  THE GRAPH  LINES:  (In Example: ”Figures shown in 10s of thousands of dollars.  2 = $20,000“ )
1.   Draw Horizontal Line at point representing Fixed Costs (Example = 2.0654).
2.   Draw Variable Cost Line from left end of Fixed Cost Line (2.0654) sloping upward to point where Total Costs (Fixed + Variable Expenses) on vertical scale (Ex. = 5.4110) meet Total Revenues on the horizontal scale (Ex. = 9.5000).
3.   Draw Total Revenues Line from zero through  a point describing total Revenues on both scales (Ex. = where 9 meets 9).
BREAK-EVEN POINT is that point on the graph where the Variable Cost Line intersects the Total Revenue Line.  The business in our example spreadsheet estimates that it will break even at the time sales volume reaches $31,882.  The triangular area below and to the left of that point represents company losses.  The triangular area above and to the right of the point represents potential profit.