What does break-even analysis determine for a business?

Break-even analysis is a financial tool that helps businesses determine the sales volume required to cover all costs, both fixed and variable, resulting in neither profit nor loss. The point where total revenues equal total costs is crucial for understanding the viability of a business operation. By finding this break-even point, a business can assess how many units of a product must be sold to start making a profit beyond that point.

This analysis is particularly important for entrepreneurs and managers as it informs pricing strategies, budgeting, and forecasting. Knowing the break-even point allows businesses to make informed decisions about production levels, pricing policies, and understanding their cost structures. It is a foundational concept in cost-volume-profit analysis, which aids in strategic planning and cost control.