The break-even point is the actual value, on a company’s financial statement, that the revenue covers fixed and variable costs . That is, by its calculation, it is possible to know how much is needed to cover the total costs incurred in the production and marketing of its products and services.
Taking this concept into account, it is proper to reach the conclusion that in the break-even point the profits are zero. As such, if the sales above this point exceed the amount made, then the company stands to make a profit, and vice versa, by being below this point so that the company stands a chance of making a loss.
We prepared this material to make you understand even better about the topic, which answers the major questions surrounding the break-even point. Enjoy reading!
What is financial breakeven?
The financial break-even point is a means of establishing whether the firm’s total revenue equals the sum of its costs and expenses. It can then calculate the amount of sales required in order to cover operations without incurring any loss.
Also known as the break-even point, it is an administrative reference value which enables one to know if the business is in deficit or surplus. When the money out flows directly equals money inflows, then it means that we have attained this point target.
In other words, If the revenue is less than the break-even point, then it means that a firm is spending more than what it earns. Conversely, if the sales exceed this break-even point, then the firm will make some profit.
How important is the break-even point in business management?
The break-even point value is important for good business management because, with it, the entrepreneur can closely understand the profitability, profitability and viability of his business.
The value of the break-even point makes it possible to know precisely where your company starts to make or lose money and how much it needs to sell. This helps the manager plan better and predict when the need arises to change costs and production capacity.
It is also a very important indicator of how sustainable a company is or isn’t. For after all, the more dangerous it is to get to the break even point, the safer it is. And the less dangerous a business is, the better it is for getting investments, credit, etc.
What are the differences between the financial, accounting and economic break-even point?
There are three types of break-even points: financial, economic and accounting. Understanding the differences between them helps you make more assertive and profitable decisions.
The accounting break-even point is much more commonly used since it is less complicated. Here, the contribution margin is divided by the fixed costs and expenses. The result comes out to be the revenue needed to equalize expenses.
There are two types of break even point. One is the financial breakeven point, which does not include depreciation of assets and other non-cash expenses in fixed costs.
This is because, for example, some companies include depreciation as a cost in their annual balance sheets-for example, if an asset was worth R$100 and is now worth R$70, those lost R$30 are included in the company’s list of costs or expenses.
Note that this difference is ignored, as what matters are the expenses that represent an outlay of cash from the company’s cash flow .
The second one is the economic break-even point, wherein besides the addition, the amount is increased with the help of the value of the opportunity cost. In that process, a monetary adjustment takes place along with the fixed expense.
The reasoning is as follows: if the entrepreneur did not invest in the company, he could invest his money in an investment that would yield, for example, 15% per year.
The economic break-even point takes this margin into account, that is, you only “break even” when you pay your expenses and have a return compatible with the percentage that the money would yield if it were idle in the financial market.
If you are unsure about what type of break-even point to calculate for your company, contact your accountant. They are the best professionals to guide entrepreneurs at this time.
What is the calculation for the break-even point?
In order to calculate the break-even point, one has to calculate fixed expenses and contribution margin. Moreover, the contributing condition emphasizes the proportion between these two factors.
Read on to understand how to do these calculations:
Fixed expenses
Here, you will consider the costs of keeping the company running, regardless of its production. This includes rent for the office or point of sale, employee salaries, water, electricity, gas; office supplies, hygiene and cleaning, cleaning services, maintenance and security.
What is not included in this calculation are your expenses with the products that will be resold or with the raw materials for production, sales taxes and sales commissions. This is because these costs are already included in the product’s sales price.
Contribution margin
The contribution margin is the gross profit on sales. In addition to being useful for finding the break-even point, it is often used to calculate the selling price of products.
To find your contribution margin, you add together your production costs (products or inputs purchased from your supplier) and your variable expenses (sales taxes and sales commissions), and then subtract the result from the sales value. See the formula below:
Contribution margin = sales value – (production costs + variable expenses)
The amount obtained will be used, firstly, to pay the company’s fixed expenses and, then, for profit.
Breakeven point formula
The most common calculation used to reach the break-even point is very simple. You add up your business’s fixed expenses and divide them by the contribution margin. The formula looks like this:
Breakeven point = fixed expenses / contribution margin
But you do pay attention to how you use the formula you’ve learned, because the contribution margin is used as a percent. For example: suppose that you spend R$10 to produce your product, and you sell it for R$13. The contribution margin is R$3, which is 23 percent of the sales price.
The calculation to find this percentage is as follows:
(Contribution margin / sales value) x 100
Using the example given above, it would be:
3/13 = 0.23
0.23 x 100 = 23%
Then, this percentage must be transformed into a decimal number, to apply to the formula. This means that 23% becomes 0.23, just as 30% would become 0.3 and so on.