What is “break-even analysis” used for?

Break-even analysis is a financial tool used to determine the point at which total revenues equal total costs, resulting in neither profit nor loss. This concept is essential for businesses as it helps identify the minimum sales volume required to cover all costs associated with production and operation. Understanding the break-even point allows a company to evaluate its financial performance and make informed decisions regarding pricing, budgeting, and resource allocation.

In practical terms, once the break-even point is established, any sales beyond this threshold contribute to profit, while sales below it indicate a loss. Thus, it serves as a critical metric for financial planning and risk management, helping businesses understand their cost structure and pricing strategies.