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Understanding Break-even Analysis

Understanding Break-even Analysis

Why does it matter so much for new businesses?

One of my friends recently bought a home, and we met for dinner. He explained how that purchase would turn into a good investment in a couple of years. At some point during the discussion, he uttered the phrase, “In 18 months from now, I will hit break-even”. I suddenly guessed he has a great analytical and business mindset and knows what he’s doing. “Break-even Analysis.” is an important analytical technique that is used by many wise investors and new businesses to know what it takes to turn things profitable. Let’s dig into this topic and understand what it is, why you do it, and how to perform the analysis in detail.

Definition

In simple terms, Break-even Analysis is an analytical technique to determine the least level of output (in units or dollars) the business needs to generate to fully pay off the cost of producing the goods or offering the services.

It is generally performed while developing a pricing strategy, either as part of a marketing plan or a business plan. The goal is to achieve a Break-even Point (BEP) at which the total costs and revenue are equal. That means there is no net loss or gain. Break-even.

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