Calculating Break-Even Analysis In Excel: A Complete Guide
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
There are many manual or automated ways that a company might use to determine prices for their products, forecast how many units they might sell or analyse their finances to ensure their revenue exceeds costs. One method is to use a break-even analysis in Excel. Learning how to calculate this crucial number in a spreadsheet can help you create a template to use when forecasting and planning your sales. In this article, we discuss what a break-even analysis in Excel is, explain its importance and share key steps you can take to calculate and use this formula in your spreadsheets.
What Is Break-Even Analysis?
A break-even analysis is a function that companies can use to determine how much revenue they might require to cover their costs. This function is a tool in Microsoft Excel that can help you calculate this figure for effective financial planning for the company in which you work. There are three components in the formula for a break-even analysis:
Total fixed costs: Fixed costs is the amount a company pays that stays relatively consistent month-to-month. They might include costs like rent and utilities.
Total variable costs: Variable costs are those that can change each month depending on company requirements. They can include costs like raw materials, commission and wages.
Revenue: Revenue is the income a company earns in a particular period.
With these three components, you can reach a break-even point if the total fixed and variable costs equal revenue.
Benefits Of Doing Break-Even Analysis In Excel
There are several key benefits to performing a break-even analysis in Excel, which include:
Performing automated calculations
Rather than manually calculating these projects, Excel provides you with the opportunity to do this through automated functions. You can predetermine the cells where the program can identify your costs and input your revenue for convenient calculation. You can then reuse this formula each time you attempt to perform a break-even analysis.
Break-even analysis can help you figure out how you might price the items you want to sell so that your revenue exceeds your cost. For example, if your costs are ₹10,000 a month and you expect to sell 100 units, you can adjust your pricing to be at least ₹100 to make your money back. You can also use this to see how many units you might require selling to reach a break-even position if you have fixed prices for all items.
Understanding contribution margins
Calculating the break-even point can also help you understand your contribution margins. These are the numbers that can show you how profitable certain items are. You can understand this figure by subtracting variable costs from revenue earned. From there, you can subtract the fixed costs per unit and see how much profit a specific product can generate.
Types Of Break-Even Analysis
Finance departments can use different types of break-even analysis to model scenarios, such as:
Cash flow break-even analysis
Here is the formula for cash flow break-even analysis:
Fixed costs + loan payments - cash outflows / (Sales price per unit - variable cost per unit)
Cash flow break-even analysis determines how much money a company earns versus how much it spends. When it earns more than it spends, a company is cash-flow positive. The cash flow break-even analysis helps identify how many products a company requires selling at a mentioned price to become cash flow neutral, which means the cash outflows equal cash inflows. A manager may use this formula to determine the time or units of products or services to sell to break even.
Financial break-even analysis
Some companies give shareholders regular dividends if they have successful financial periods. It is important for a company to know how many products it has to sell to generate enough income to pay those dividends. The formula for financial break-even analysis, which includes dividends, is:
Fixed costs + earnings required for dividend / (Sales price per unit - variable cost per unit)
Break-even total sales
You can create a break-even analysis to calculate total sales for your products. First, you can calculate the contribution margin using this formula:
Contribution margin = 1 - (Variable costs / Revenue)
Once you get this value, you can use this formula to identify the break-even sales:
Break-even sales = Total fixed costs / (Contribution margin)
This provides you with a certain percentage to understand how much a unit or total sales of a unit contributes to overall sales.
Break-even units sold
Similar to the total sales factor, you can calculate the break-even point of units sold. You can use this formula:
Break-even unit = Total fixed costs / (Price per unit - variable cost per unit)
For example, if your total costs are ₹10,000, the price per unit is ₹100 and the variable cost per unit is ₹10, you can find that you require to sell 100 units to reach the break-even point.
To establish pricing for a unit, you can use several formulas. First, you can calculate the variable cost percentage per unit using this formula:
Variable cost percentage for each unit = Variable costs / (Total number of variables variable + total fixed costs)
You can then calculate the total fixed costs per unit and then an ideal price point for the product by using these formulae respectively:
Total fixed costs for each unit = Total fixed costs / Units
Break-even price = 1 / ((1 - Variable cost percentage for each unit) x (Total fixed costs for each unit))
How To Use Excel To Do A Break-Even Analysis
Microsoft Excel spreadsheet is a useful tool for calculating the break-even point of a product or for a company. Excel allows you to create a calculator customised to the particular situation the company your work for is forecasting. Doing so gives you the flexibility to change variables to examine different scenarios in your break-even analysis. You can follow these steps in Excel to build a calculator to do your break-even analysis:
1. Determine the relevant break-even analysis
Break-even analyses are useful in figuring basic profitability, cash flow or income. When getting started, determine the components you aim to calculate. Gather all the related information and documents to make the process streamlined and efficient.
2. Identify the variables in the analysis
For a basic break-even analysis, you require creating six rows. Each row corresponds to a variable involved in the break-even analysis. Include a row for:
Variable cost per unit
3. Enter the variables into the Excel spreadsheet
You can structure your spreadsheet in the way which is the most convenient for you. One simple approach is to enter the variables into column A, using rows one to six. Ideally, you want to keep those six variables in the specific order list above, starting with the unit sold and ending with profit.
4. Enter the break-even formula
The next step is to program the formula into the appropriate cell for the variable you are focusing on in your break-even analysis. For example, if you want to know how many units you require selling to break even, you can put the formula into the units sold cell, which can be Row 1 in your spreadsheet. Enter the basic break-even formula into cell B1 based on the corresponding Excel cells:
Example: [= B4 / (B2 - B5)]
5. Collect the other variables
To complete the analysis in Excel, enter the other data points in your variable cells. You can use numbers from previous financial statements or figures based on your calculation requirements. It might be helpful to use previous numbers if you believe the business is likely to remain steady, while forecasts can be useful if the business expects major operational changes, like an expansion into a new market.
6. Conduct your analysis
Once you have entered the known data into the respective cells, the units sold usually appear in Cell B1. You and your co-workers can discuss that number and potential ways to achieve it.
It is also possible to adjust the Excel calculator to model other variables. For instance, one way to achieve break-even may be to adjust prices. Using this Excel calculator, you can conduct several scenarios to see where you can make more profits.
Please note that none of the companies mentioned in this article are affiliated with Indeed.
Explore more articles
- How To Improve Business Conversation Skills (With Tips)
- What Is MS Office? (Plus Other Helpful FAQs To Review)
- Core strengths needed to succeed in the new world of work
- What Is Assertive Leadership? (With Benefits And 10 Tips)
- A Complete Guide On CPC Certification (And How To Earn One)
- Tips for a Successful Skype Interview
- How To Host An Event: A Complete Guide With Steps And Tips
- Similarities and Differences Between C++ and Java
- 10 Tips For Working Effectively And Improving Productivity
- Debit Vs Credit In Accounting: The Key Differences
- How To Write A Career Goal Statement? (With Additional Tips)
- 18 Commonly Used Dental Tools (With Tips On Maintenance)