What is the purpose of break-even analysis?

The purpose of break-even analysis is to identify when total revenues equal total costs. This analysis is crucial for small business owners as it helps them understand the minimum performance required to avoid losses. By determining the break-even point, business owners can make informed decisions about pricing, sales targets, and financial planning. This information is essential for evaluating whether a product or service is viable, as it highlights the volume of sales needed to cover all fixed and variable costs.

Understanding the break-even point allows businesses to evaluate their financial health and make adjustments to reach profitability. It serves as a foundational metric that informs strategic planning and operational efficiency, enabling better predictions about future profitability based on different sales scenarios.