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Before looking at the methods used to create a break-even analysis chart, it’s worth explaining what break-even means. In simple terms, it describes the point at which the revenue coming into a business via sales is equal to the total costs generated by that business. By discovering the break-even point of your business, you discover the precise number of units which need to be sold in order to cover all costs. Once you know that figure, use it as a basis from which to drive sales onward and generate profits. Sitting down to create a break-even analysis chart is a relatively quick and simple way of finding out exactly where that break-even point lies.
How to make a break-even analysis chart
There are two methods for analysing the break-even point of your business. A break-even calculation is a numerical method, whereas a break-even analysis chart is a pictorial representation of the situation in the form of a graph. The chart itself is based around four variable figures:
Fixed costs – business costs which stay at the same level, no matter how many units a business produces. Examples include rent and business rates.
Variable costs – variable costs which rise and fall in line with the number of units a business produces. Examples include the money which needs to be spent on raw materials and the wages paid to employees actually manufacturing the units.
Total costs – the amount arrived at when you add fixed costs to variable costs.
Revenue – the money which comes into a business having been generated by sales. Revenue is distinct from net profit in that it is the amount coming into the business before any expenses are deducted.
The break-even point for a business is reached when the revenue coming into the business is the same as the total costs. The four variables detailed above are represented by lines on the break-even analysis chart which represent their value depending upon the level of output at a given time.
Create a break-even analysis chart
The first step is to draw two axes. The first is a vertical axis which displays the costs being generated. The second is a horizontal axis which displays the quantity of units being produced.
The next step is to draw a line which indicates the fixed costs of the business. These don’t alter over the short to medium term, so the line representing fixed costs is a horizontal line running in parallel to the axis representing the quantity of units.
The third step is to add the line which represents the variable costs of the business. These rise and fall in direct proportion to the number of units which the business is producing, so the line starts from the point at which the two axes intersect. From this starting point, the line representing variable costs slowly increases.
The fourth step is to add a line which represents the total costs of the business. As this line represents the total of fixed and variable costs, it starts from the point at which the cost axis (the vertical axis) meets the line representing fixed costs, and it gradually rises.
The fifth step is to add a line representing revenue to the break-even analysis chart. Revenue directly relates to the quantity of goods being produced and sold, so the line starts from the point at which the vertical and horizontal axes meet, and gradually rises.
The sixth and final step is to mark the break-even point. If you have drawn the various lines correctly, there should be a specific point at which the lines representing total costs and revenues intersect.
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