What is break-even analysis used for?

Break-even analysis is a financial tool used to identify the point at which total revenues equal total costs, resulting in neither profit nor loss. Specifically, it calculates the minimum sales volume required to cover all fixed and variable costs associated with a product or service. This helps businesses understand the sales level needed to start making a profit after all expenses are accounted for.

This analysis is crucial for setting sales targets, pricing strategies, and evaluating the financial viability of business projects. It provides insights into how changes in costs or sales volumes will impact profitability, making it an essential aspect of strategic planning.

While determining profitability over time, forecasting future financial performance, and assessing market risks are important aspects of financial management, they do not specifically relate to the primary function of break-even analysis, which focuses exclusively on identifying the sales volume necessary to reach the break-even point.