Break-even analysis is used to determine at what point you are able to cover all expenses and begin to make a profit. This is crucial in business as well as special event planning.
It is important to consider all costs in the equation. To get started identify the costs and contribution margin.
Fixed Costs: Expenses that do not change no matter how much business you have or items you produce. Examples: Rent, utilities, license fees, salary, leases, etc.
Variable Costs: Expenses that depend on the company’s production volume or business level. Costs rise as production increases. Examples: cost of materials, freight, commissions, credit card fees, hourly labor, etc.
Contribution Margin = Price – Variable Cost
Break-even for Quantity = Fixed Costs / Contribution Margin
Break-even for Quantity = Fixed Costs / Price – Variable Cost
Here is an example:
Let’s say we are putting on a concert. We know our fixed costs are $15,000. We plan on selling tickets for $20 each. The variable costs are $5 per ticket.
Break-even = $15,000 / ($20-$5)
This means 1,000 tickets would have to be sold to break-even.
It is extremely hard to break-even on a first year event. Most event producers will give an event anywhere from 3-5 years to determine if it will be profitable and should continue. I watch break-even points obsessively when I produce special events. It is the best way to make sure you recoup expenses and manage costs closely.
Break-even analysis also helps predict if an event will be successful or not. Let’s say in the example above that the venue only allows you to sell 700 tickets. Based on the break-even analysis you know with the $20 ticket price there is no possible way to break-even on ticket sales and this concert is going to lose money. You need to charge more for tickets, cut costs, or accept the concert won’t make money. At least you know all your options because you took the time to investigate the break-even analysis.
Want to reduce your break-even point? Check out this post on AccountingCoach.com.
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