What is the purpose of a break-even analysis?

The purpose of a break-even analysis is to identify the sales volume at which total revenues equal total costs. This point, known as the break-even point, is critical for businesses as it indicates the level of sales needed to cover all expenses, both fixed and variable, allowing the company to understand the minimum performance required to avoid losses.

Understanding the break-even point helps businesses in pricing strategies, budgeting, and financial forecasting by revealing how many units must be sold to cover costs. It serves as a foundational tool in financial planning and decision-making, enabling managers to assess the risk of new projects or products and to evaluate the potential for profitability.

While minimizing expenses, maximizing profits, and forecasting growth are important aspects of business management, they are secondary objectives that can be informed by analyzing break-even data. Hence, determining where total revenues meet total costs is essential for achieving broader financial goals.