If you’ve ever thought about building a business around one of Tennessee’s agricultural products, you’ve probably heard the term “break even.”

Put simply, this is the point at which revenue is exactly equal to costs. You make no profit, but you also incur no losses.

But it may not be enough just to break even. You may need a return on your investment. If you can’t reach this goal, you may not produce this product.

To figure the break-even point, you have to look at two types of costs: fixed costs and variable costs. Fixed costs are overhead expenses that don’t change with changes in the product.

But variable expenses do change with how much you’re producing. So we express variable expenses on a per unit basis.

Figuring the break-even point isn’t always simple. Sometimes the selling price and costs don’t remain the same. These change the break-even point. So you can’t calculate a break-even point only once. Calculate it on a regular basis.

Here’s the equation for determining the number of units required to break even: average annual fixed cost ÷ (average per unit sales price - average per unit variable cost).

And here’s the equation for determining the break-even sales: annual fixed cost ÷ 1 - (average per unit variable cost ÷ average per unit sales price).

In most instances, success takes time. Some businesses actually operate at a loss in the early stages of development.

But you have to know the break-even point to decide how long losses are permissible. It also gives you a way to measure your short-term goals.