What is a "break even point"?

The term "break-even point" refers to the time when income covers all expenses, according to Dictionary.com. Reaching break-even point is critical for every new business because it represents the point when the firm is no longer operating at a loss.

Whenever a sale is made, the proceeds need to cover two types of expenditure: fixed costs and variable costs. The former covers expenses such as machinery or rent, while the latter accounts for materials, labor and shipping costs. The key difference between the two is that fixed costs remain stable no matter what the sales volume is, while variable costs differ according to the level of sales. If sales decrease then variable costs will also be lower.