What is it, what is it for and how to calculate the break-even point?

Do you understand what the smash-even factor is? It is a easy calculation which could substantially make a contribution to financial planning and to figuring out the health of a commercial enterprise. However, no longer all entrepreneurs are acquainted with the concept or recognize a way to practice it.

It is critical to maintain in thoughts that any business have to try to maintain manage of its price range, be prepared and recognize exactly what the income goal is. And all of these techniques can benefit from this calculation!

But what is the damage-even factor? Continue analyzing to recognize the which means of this indicator, as well as the way to calculate it and how the result impacts budget. Check it out!

What is the break-even point?

The term refers to a mathematical calculation that identifies how much a company needs to sell in order to avoid losses from its operations. Reaching this level means that all capital inflows are sufficient to cover outflows, including taxes and other expenses.

In other words, the indicator assumes that the company’s profit is zero. If the business reaches this balance, it means that it is able to pay for itself. When it exceeds the indicator, revenues exceed costs and there is a profit.

In this sense, the break-even point is variable, since each company has its own production costs and specific expenses. For this reason, you must learn how to calculate it correctly.

It is worth noting that there are different types of break-even point. Although the most common is the so-called accounting one , there are also financial and economic ones .

Understand the differences between them!

Accounting breakeven point

It identifies the amount of revenue needed for the company to cover all its expenses. This calculation is valuable for finding out whether the company is generating profits.

Financial breakeven point

The difference with the financial calculation is that this does not consider losses such as amortization, depletion and depreciation, even though these factors can reduce profit. This is because there are managements that include these items as costs inherent to the enterprise.

Economic breakeven point

Unlike the financial model, the economic model considers elements such as amortization, depletion and depreciation. It also includes the opportunity cost in the calculations. For this reason, it is considered the most complete calculation among the three.

How important is this indicator in business management?

Now that you know what it is, you’ve probably realized how important it can be for business management and financial planning .

After all, it is from this calculation that the manager finds out whether the company is making a profit and what the minimum quantity of products that need to be sold is to avoid losses.

Furthermore, it is an essential indicator for budget planning. This is because it can be used in financial projections. If you are looking for investors, this can be a crucial factor in obtaining the desired resources.

What’s more, the break-even point can be used as an indicator to organize sales targets. For example, if it is necessary to sell 500 units of the product just to pay off debts, it is possible to establish realistic targets for the salespeople.

Another important insight provided by this calculation is that it allows you to identify which products are selling the most and the least. This way, you will be able to better organize your product pipeline and focus your efforts on selling certain items over others.

Finally, by integrating the financial break-even point with technological solution, it is possible to have better control and monitoring of sales, revenue, expenses and finances in general.

Which formula to use?

After understanding its importance, it remains to know the formula to perform the calculation. It works like this:

Break-even Point = (Fixed Cost / Revenue – Variable Cost) x contribution margin.

To understand this in practice, consider an example. Imagine a company that sells T-shirts at a price of R$20 per unit. The cost of fixed expenses, such as salaries and rent, is R$3,000 and the cost of variable expenses, such as raw materials, is R$10 per unit.

In this example, the contribution margin is R$10 (R$20 of revenue – minus R$10 of fixed and variable expenses). Then, to obtain the break-even point, simply do the following calculation:

Breakeven Point = (3000 / 20 – 10) x 10

Breakeven Point = 3000

This means that the company will need to sell 3,000 units of t-shirts to break even and avoid losses. Therefore, this calculation makes it easier to plan and make decisions in the business, aiming to ensure profit and continued sales.

How do I interpret the result of this indicator for my company?

As you saw in the practical example, through calculation it is possible to find out the minimum quantity of products that need to be sold. This is a way to have more security so as not to end the month in the red.

But to do this, you need to know how to interpret the indicator’s result. In this sense, consider that the lower the result of the calculation, the better the company’s situation. This is because the break-even point would show that fewer products need to be sold to cover costs.

And in addition to indicating the minimum quantity of products to be sold, it also allows you to have an idea of ​​how many sales need to be made in order to make a profit.

In addition, there are other points of attention that you should consider in your interpretation. Among them:

• the break-even point is calculated according to sales projections;
• the lower the result, the lower the risks involved in the business;
• the lower the result, the higher the company’s costs with variable expenses compared to fixed expenses and costs.