Are you looking to make a profit with your business? Of course, it is common. However, when you start a business, it takes many years to see some profit. On making a profit or entering the profit territory, it may remain at the breakeven point for some time. To calculate the breakeven point, one should know the total revenue equals the total expenses or costs. It is the point that has no loss or profit; it means the break is even.
Where is a breakeven point put to use?
A break even point formula is used in business and finance in multiple areas. It refers to the production level such that the total production revenue equals the costs. The breakeven point while investing is the point equaling the original cost of the market price. In options trading, the breakeven point takes place when an underlying assets market price reaches a level that a buyer does not incur a loss.
How to calculate the breakeven point?
In businesses, to calculate breakeven point, fixed costs are divided as per the margin of gross. It produces a dollar figure for a company to break even. The breakeven point is where the revenues of a company equal the costs. The breakeven point calculation is in two ways:
- One is by determining the unit’s amount be sold.
- Second is the sales amount in dollars to take place.
The breakeven point reveals a company when its products begin to get profitable. If the revenue of a business is below the break-even point, it is an indication that the company is running at a loss. The same company showing revenue above the break-even point is at a profit.
Concerning stocks, a stock worth $200 and the same reaches after nine months to $200 after falling from $250 is an indication of reaching the breakeven point. Remember that when it is breakeven, the stock or the business is at a point that your total sales = the total expenses, there is no profit or loss. Typically, reaching a breakeven point for the first time means it offers your business a positive turn. It means, finally, you are making sufficient money to cover the operating costs.
Finding a break-even point helps in determining, whether you need one or both the following:
- Cut expenses
- Increase in prices
When the revenue of a business is below or above the breakeven point, it is a loss or profit. Use break-even point to assess how much to sell to make a profit or cover costs. Monitoring the breakeven point helps to control costs, set budgets, and arrives at a pricing strategy.
Breakeven Analysis
Learning to find a break-even point implies you must be aware of the breakeven analysis formula. However, for this calculation, you require these:
- Variable costs
- Fixed costs
- Product selling price
Variable costs are based on the sales activity. It means the more you sell, the more costs will increase. For instance, the direct labor and materials costs increase with the sales numbers.
The expenses staying the same are known as fixed costs, and this cost does not change, regardless of the sale. It is a type of expense you incur to run a business, such as insurance and rent. The product selling price is the amount you charge for a product or unit.
Break-even point formula
The break-even point formula:
Per unit Breakeven point = fixed costs/per unit sales price- per unit variable cost.
The sales price minus variable cost is the contribution margin per unit. This contribution margin reveals the amount of profit you will take home from a sale. The breakeven point refers to the total fixed costs divided by the unit price difference and per unit variable cost. Bear in mind the overall costs are the fixed costs, while the variable cost and the sales price are per unit price.
To calculate the sales break-even point, use:
Sales Dollars Break-even Point = Fixed Costs / [(Sales – Variable Costs) / Sales]
This formula is also suitable as a breakeven analysis formula. It helps in making adjustments with expenses or pricing.
Importance of break-even analysis
The importance of break-even analysis is in the following conditions:
- Create a new product- The focus area for any business is breakeven analysis. It is when a new service or product is launched in the market. It involves high costs in product manufacturing or operating services.
- Initiating a new business- The breakeven point analysis is crucial for start-ups. It assists in deciding a business idea visibility, in association with formulating pricing costs and strategies.
Business model alteration- Alteration in a business model means costs can change relying on the point if it is scaling up or downsizing. Thus, following the breakeven analysis formula is important to decide on the selling prices while changing business models.