5 STEPS TO PERFORMING A BREAK-EVEN ANALYSIS IN EXCEL

A break-even analysis is financial tool that helps you to determine the point at which total costs and total revenues are equal, meaning there is no net loss or gain. It's a fundamental step for new businesses, product launches, or evaluating profitability under different scenarios. Excel is perfectly suited for this analysis, allowing you to build a dynamic model.

5 Steps To Performing A Break-Even Analysis In Excel

Here are five steps to performing a break-even analysis in Excel.

Step 1: Identify and Categorize Your Costs

The first step is to clearly define and separate your costs into two main categories:

• Fixed Costs: Expenses that do not change ever based on volume of goods or services produced (e.g., rent, salaries of administrative staff, insurance).

• Variable costs are business expenses that fluctuate directly with the level of production or sales. Simply put, as your output goes up, so do these costs, and vice-versa. While the total amount changes, the cost per unit generally stays consistent. (e.g., raw materials, direct labor, sales commissions).

• Excel Setup: Create a section in your spreadsheet to list these costs. Sum them up to get Total Fixed Costs and Variable Cost Per Unit.

  
  

Step 2: Determine Your Selling Price Per Unit

This is the price at which you sell each unit of your product or service.

Excel Setup: Dedicate a cell for Selling Price Per Unit.

Step 3: Calculate the Contribution Margin Per Unit

Contribution margin per unit is amount each unit sold contributes towards covering fixed costs and generating profit.

Formula: Selling Price Per Unit - Variable Cost Per Unit

Excel Setup: In a new cell, enter the formula referencing your Selling Price Per Unit and Variable Cost Per Unit cells.

Step 4: Calculate the Break-Even Point in Units

Now you can determine how many units you required to sell to cover all your fixed costs.

Formula: Total Fixed Costs / Contribution Margin Per Unit

Excel Setup: In a cell, apply this formula, referencing the Total Fixed Costs and Contribution Margin Per Unit cells. The result will be your break-even point in units.

Step 5: Calculate the Break-Even Point in Sales Revenue (Optional but Recommended)

It's also useful to know the total sales revenue needed to break even.

Formula: Break-Even Point in Units * Selling Price Per Unit

Alternatively: Total Fixed Costs / (Contribution Margin Ratio) where Contribution Margin Ratio = (Selling Price Per Unit - Variable Cost Per Unit) / Selling Price Per Unit

Excel Setup: Calculate this in a separate cell.

Building a Dynamic Model:

To make your analysis truly dynamic:

• Input Section: Designate clear input cells for Total Fixed Costs, Variable Cost Per Unit, and Selling Price Per Unit.

• Formulas Section: Place your calculation formulas in separate cells, referencing the input cells.

• Data Table (What-If Analysis): Use a Data Table (Data > What-If Analysis > Data Table) to quickly see how the break-Even Point changes with different selling prices or variable costs.

• Chart: Create a simple line chart showing Total Revenue, Total Costs (Fixed + Variable), and Fixed Costs lines. The intersection of Total Revenue and Total Costs will represent your break-even point.

By following these steps in Excel, you'll gain critical insights into your business's financial viability, helping you make smarter pricing, production, and investment decisions.