Break-Even Analysis - How to Calculate your Safe Point NARRATOR: When it comes to starting a business, achieving liftoff can be exhilarating. However, it's also when the journey can be the most perilous. Immediately after launch, the business is working just to stay afloat until the point you know you're in the clear. But what does that mean? And how will you know? It's called break-even. And put simply, it's the point at which a business is neither making a profit nor a loss. Rather, it's momentarily floating in limbo. The break-even point is the total amount of sales a business needs to achieve before it starts being profitable or, more technically, a business's fixed cost of production, like rent, divided by how much you sell the product for minus the variable costs per unit sold, like ingredients or materials. How much you sell the product minus variable costs is usually called your contribution margin. Confused? Don't worry. Here's an example. Let's say it costs Pizza Planet $8.00 to make one pizza, and they sell the pizza for $12. That means their contribution margin is $4.00. So if Pizza Planet's only fixed cost is $500 rent, to find out the number of pizzas they need to sell to break even, they simply divide the rent by the contribution margin. This means they need to sell 125 pizzas. And any pizzas sold after that would contribute to the company's net profit. So you can see by conducting a break-even analysis, a business is able to determine the price of a product, how many need to be sold, as well as identify and potentially reduce excessive fixed costs, ultimately, allowing a business to reach profitability and beyond. [MUSIC PLAYING]