Break-Even Analysis: A Best Practice for Manufacturers

As a manufacturer, understanding your break-even point is essential to ensuring your business stays profitable. This article covers what break-even analysis is, how to calculate it, and why it’s a crucial tool for making informed business decisions. We also show you how modern business analytics tools can simplify this process and help you focus on improving your bottom line.

What is Break-Even Analysis?

At its core, break-even analysis is the point at which your company’s revenue equals its costs over a specific period—say, a month or a quarter. This is a relatively simple concept but one that often gets overlooked. Sometimes, only a few people in the company, such as owners or managers, have a sense of the break-even point, and they may not always be using current information. As a result, teams involved in bidding and quoting new work may make decisions based on stale data.

Why It’s Important to Stay Up-to-Date

Accurate break-even data is essential for sales and quoting teams, ensuring that the pricing of new work reflects the business’s actual costs. Using current information can make or break your profit margins.

Before diving deeper, let’s quickly define two important terms:

Fixed costs: These are expenses that remain stable regardless of revenue, such as rent, salaries, or equipment leases.
Variable costs: These fluctuate with production volume, including costs for materials, labor, and utilities.

How to Calculate Break-Even

To calculate your break-even point, you’ll need to categorize every expense in your financial system as either fixed or variable. Ideally, this is done within your general ledger or by using a tool that extracts data from it.

If that’s not possible, the next step is to pull the data into Excel and manually calculate totals for both fixed and variable costs. Once you have those figures, you can use basic algebra to calculate your break-even revenue.

For example, let’s say your variable costs are 54% of revenue, and your fixed costs are stable. By applying this data to a simple spreadsheet formula, you can estimate both your break-even point and any incremental profit from exceeding it.

Manual Calculation Example

Let’s take a look at how this works in a manual calculation:

Fixed Costs: $X (same for every period)
Variable Costs: 54% of revenue
Profit: Revenue minus fixed and variable costs

From this, you can calculate your break-even point and any additional profit from increased revenue. For instance, if revenue grows from $1.6 million to $1.7 million, the incremental profit would be $46,000, which aligns with our variable cost rate.

Automating the Process

While manual calculations built in Excel are useful, they can be time-consuming and prone to error. Regularly updating fixed and variable cost rates is a challenge for many companies, and if the process becomes too cumbersome, it may not get done at all.

That’s where automated tools come in—for example, Fathom. Fathom allows you to automate break-even calculations, making it easy to regularly review and adjust your costs. This ensures that your sales and quoting teams are always working with current, accurate information.

How Fathom Can Help

Using Fathom, you can view real-time break-even calculations and see how incremental changes in revenue affect your bottom line. For example, you can visualize the impact of increasing revenue from $1.6 million to $1.7 million and see how much profit comes through after accounting for fixed and variable costs.

With this data in hand, you can make smarter decisions about pricing, production levels, and business growth, ensuring that your business remains profitable in a competitive market.

Why Regular Break-Even Analysis Matters

The true value of break-even analysis lies in its regular use. By keeping your cost rates updated and accessible, everyone in your business—especially the sales and quoting teams—can make better-informed decisions.

For example, understanding your current break-even point can help you determine how aggressive you should be with pricing new work. It also ensures that the cost rates and markups used in your quoting process reflect current business conditions, which is critical for maintaining profitability.

Conclusion

Break-even analysis is a fundamental tool for manufacturers, and with the right approach, it can be made easier and more effective. Modern business analytics tools like Fathom allow you to automate calculations, focus on key insights, and make smarter decisions that drive profitability.

If you have any questions or want to learn more about how break-even analysis can benefit your business, feel free to reach out to us at Chortek. If you found this article helpful, please share it with others who may benefit from it. Thanks for reading!