Understand what Break Even Point is and how to find the balance point of your business – WAU
Break Even Point is a financial management tool that shows exactly when the company starts to make a profit. Knowing how to calculate and analyze it is important for the vitality of the business.
A common question for those who have a business is whether their prices are compatible with the market or if what they sell is enough to pay all the bills and still make a profit.
Break Even Point is a financial management tool that can help companies, regardless of their size, to get those answers.
Knowing how to find financial balance can be a turning point for small entrepreneurs, who often feel they are paying to work. Especially for those who are at the beginning of their company, having this data in hand can result in better decision making about your business model.
Continue reading and find out:
What is Break Even Point?
Break Even Point is a financial management tool that allows you to find the balance point of the business, that is, exactly what is the number of pieces that must be sold monthly for expenses to be paid. That is, the minimum necessary so that it does not damage.
From this calculation, a series of analyzes can be made, which will help to better direct the company, for example:
- whether the quantity of what is sold is compatible with costs;
- whether the value of the products is adequate to what is spent;
- if the costs are very high, to the point of almost not reaching the break even point in a reasonable time;
- if there is any cut in costs that can be made to reach the break even point more quickly.
In a graph of quantity of products sold x sales revenue, is the exact point where the billing and cost lines cross and have the same value.
How important is Break Even Point in your business?
Break Even Point analysis is important to have greater business management and control. Not only does it contribute to financial management, but it also affects other areas, since the questions asked above also help to better shape the business model.
It is not uncommon for entrepreneurs to realize that they are having losses or a very low profit on what they are selling and need to make changes, so that they remain competitive, but in a more profitable way.
For finance management, Break Even Point is essential, because together with other indicators, such as ROI and Payback, the manager can get an overview of the financial health of the enterprise.
In addition, it can also interfere with marketing, pricing and, consequently, sales.
How to find Break Even Point in the financial statement?
Now that you know what Break Even Point is and how important it is, you also need to learn how to calculate it.
To find the balance point, you need to have some data on hand, which must be real, that is, without errors. This data will be placed in the formula and any adulterated value can lead to inconsistencies and, consequently, Break Even Point will be wrong.
- fixed costs: are the company’s expenses that do not depend on the volume of sales. For example: water, electricity, rent, wages;
- variable costs: these are costs linked to sales volume. The higher the sales, the higher the variable costs. Examples: spending on materials for production, spending on packaging, delivery, etc .;
- final sale price of the product.
It is important to note that taxes need to be separated to perform the calculations. Those that are fixed, such as those related to labor laws, are at fixed costs, while those that depend on the sale to be charged, are at variable costs.
The Break Even Point formula is very simple to calculate, after you have this data. The break-even point is then:
Break Even Point = Fixed Costs
(Final Price – Variable Costs)
This difference between the final price and the variable costs is also known as contribution margin.
Break Even Point = Fixed Costs
To exemplify, we will use as an example the calculation of the equilibrium point of a t-shirt e-commerce, whose fixed costs are 10 thousand reais, the variable cost per shirt of 35 reais and the final price of 75 reais. The Break Even Point would then look like this:
Break Even Point = 10,000.00
(75.00 – 35.00)
Break Even Point = 10,000.00
Break Even Point = 250
That is, e-commerce needs to sell 250 t-shirts monthly so that it has neither profit nor loss. Over 250 shirts, the business starts to make a profit.
It is important to remember that it is from the contribution margin of each product sold that the amounts are paid to pay the fixed costs and also the investments and profit, being the last two taken out just if Break Even Point is reached.
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How to use Break Even Point analysis?
Based on the number of units that need to be sold monthly, it is possible to make a more in-depth analysis of administrative, financial and marketing management.
There are 3 points that can be analyzed and altered: price, costs and sales. Any change in one of the 3 points causes changes in the Break Even Point value. As we know that the market is very dynamic and you cannot control everything, it is worth keeping an eye on it.
To assist, we have separated the possible solutions that can be applied, according to the change in points:
- if sales drop: two viable solutions is to cut costs or lower the price of products.
- if you cut costs: it can decrease the value (passing on part of the cut to customers) or decrease the units that need to be sold for the Break Even Point to happen.
- lower pricing: increase sales or reduce costs.
Falling sales or lower prices impact the company’s marketing and need further analysis of the reasons that led to these factors.
The best change is when you can cut costs, as they are the responsibility of the company, which must always be attentive to them. That is, it is a positive change.
Whether fixed or variable, the cut in costs contributes positively to decrease Break Even Point and, consequently, to increase profits.
What is the ideal duration to reach Break Even Point?
A common question for those who are not yet so familiar with the breakeven point is whether they have an ideal day to reach Break Even Point in the month.
This is an indirect analysis, since the time factor is not inserted in the Break Even Point formula, but it needs to be analyzed together.
The truth is the longer the time necessary to reach the break-even point, the less likely it is to achieve a high profit.
We talk about probability because some businesses have more sales at the end of the month, resulting in the Break Even Point and profit goals being achieved only in the last days. For example, a physical store that can only match billing and costs on the 20th, but which closes the checkout on the 30th with more than 30,000 profit.
Even in businesses of this type, the ideal is to reduce costs, to reach the break-even point as soon as possible.
But there is also the possibility that the business model is not adequate and needs reformulation. It could be that either the price is not good or the costs are too high.
In such cases, you may want to evaluate your marketing strategy, because the business may be focusing on the wrong persona or the point of sale needs to be changed, for example.
Finally, there are several possibilities that influence the delay in reaching the desired monthly breakeven point of the project.
As you can see, Break Even Point can relate costs, final price and sales volume, in a clear way, which may not be perceived otherwise.
As we said at the beginning, this interferes with the choices that need to be made when one side presses and the decisions that have to be made. Combined with a good marketing strategy, the break-even formula is important to help the company better understand its relationship with the market and its competitiveness.
Break Even Point is very related to business growth and revenue estimates. A well done analysis of the calculation can even help to increase sales and make the company prosper.
Therefore, we have separated an article on billing that will help you better understand what it is and learn more about it, read now!