Calculate Break-Even Point

A basic financial tool that will help you figure out at what level of your business sale of a new service, or a product will be sufficient to bear the expenses to avoid losses. Simply said, a break-even point study will tell you how many items or services a firm needs to sell to cover its costs, especially fixed expenditures. Break-even refers to a scenario in which you are neither making nor losing money but have met all of your expenses.

The link between variable, fixed, and revenue expenses may be determined using break-even analysis. A company with little fixed costs will usually have a low break-even point of sale.

Method to calculate the break-even point

The following formula is used to calculate the break-even point in units:

Break-Even Point Formula in Units

Break-even Point (Units) = Fixed Costs / (Revenue Per Unit – Variable Cost Per Unit)

Break-Even Point Formula in Dollars

The following formula is used to calculate the break-even point in dollars:

 Break-even Point (Sales in Dollars) = Fixed Costs / (Sales Price per Unit x BEP in Units)

Importance of Break-Even point to a business

It aids in determining the service or product’s minimal price.

It is vital to make more than you spend if you want your firm to survive and develop indefinitely. This may appear to be a basic and obvious concept, yet many people join the business without first determining what the product’s minimum price should be in order to generate a profit. At Break-even point analysis the establishment of a minimum product price below which you should not go if you want to get the greatest results for your company.

Helps to figure out all of the variables and fixed costs.

It is critical to understand your variable and fixed costs in order to effectively run your organization. A break-even analysis pushes you to analyse all expenses, which is a major advantage.

Importance in attracting investors

A Break-even point is required to support your claims regarding profitability and to assist investors in gaining a better understanding of the firm in which they may invest. If this makes you nervous, we must assure you that you have nothing to be concerned about. If you have put a lot of effort into your business and are seeing results, this is fantastic news since you will be able to show potential investors the fruits of your labour.

Keeping expenses in check

As previously stated, break-even analysis necessitates the calculation of all fixed and variable company costs.  It may also assist you in keeping your expenditures under control and preventing them from taking precedence over revenues. Break-even analysis is not a one-time event; it should be done on a regular basis to have a better understanding of how the organization is doing.

Methods to Increase the Break-Even Point 

• A sales mix that is less favourable. Because certain products (and services) have lower contribution margins than others, the firm will need to sell more units if a higher proportion of the lower contribution margin items are sold, hence raising the company’s break-even point.

• A drop in the contribution margin as a result of lower selling prices.

• The contribution margin has shrunk. Sales minus variable expenditures equal contribution margin. As a result, if variable expenditures rise without equivalent increases in selling prices, the contribution margin will fall. The firm will require greater revenues to pay its fixed expenditures with a lower contribution margin.

• The company’s fixed expenditures have increased. These expenses include rent, depreciation, management and executive pay, and so forth.

Methods to decrease the Break-Even Point

• Many fixed expenditures exist in a normal business, such as rent payments, administrative wages, and unused manufacturing equipment. By lowering these expenditures, the company can cover the remaining fixed costs with fewer sales.

• Increase the average contribution margin earned on each transaction to lower the break-even threshold. Reducing variable expenses is one approach to do so. Redesigning items to cut costs is one option.

• Selling a bigger proportion of goods and services with higher contribution margins is another strategy to raise the contribution margin. This may be accomplished by shifting marketing efforts to promote high-margin products and raising commissions on high-margin ones.

• Another alternative is to standardize components across product platforms to save money on bulk purchases. Another option is to improve product dependability so that warranty repairs aren’t required as frequently.

Difference between Financial Break-Even point and Accounting Break-Even point

Accounting Break-Even Point

Given a specific amount of fixed expenditures to pay for each quarter, the accounting break-even point is the sales level at which a firm makes exactly zero profits. 

Financial Break-Even Point

Given a specific amount of fixed expenditures to pay for each quarter, the accounting at break-even point is the sales level at which a firm makes exactly zero profits. This notion is used to model a company’s financial structure.

Conclusion

The point at which your income equals your costs is known as the break-even point. Break-even analysis is a useful tool for all entrepreneurs since it can show them their current variable and fixed expenses and help them figure out what their products and services should cost at a minimum. It can also serve as a useful guide for future firm actions, indicating which aspects of work employees should concentrate on in order to increase profits. Finally, the entrepreneur’s vindication point is the break-even point. They’ve taken nothing and transformed it into something valuable, which businesspeople and management can now turn into profit through increased efficiency and growth.