Good financial health and the financial balance of any company are essential for maintaining a prosperous business with an increasingly solid position in the market – regardless of its area of operation. Keeping the numbers in order, however, is not always an easy task for entrepreneurs. And that’s where the concept of a financial breakeven and its importance begins to come into play. Do you know how to calculate your company’s Break-Even Point?
The good news is that today there are a number of instruments and tools that help with this. With them, the manager can keep his company healthy and manage it efficiently. Among these tools is the Financial Breakeven Point indicator – or Break-Even Point. It should never be ignored in day-to-day business.
In today’s article, you will understand what the Financial Break-Even Point is and its importance to every business. You’ll also discover how to calculate your company’s Break-Even Point without major difficulties. Follow up!
What is Break-Even Point?
The Break-Even Point – or the company’s break-even point is nothing more than an indicator used to measure the limit between the profit and loss of a company during a given period. The break-even point is precisely the point where the total income and expenses of a company are equal in a given calculation period.
When the break-even point points to a financial loss, it means that the company had a lower revenue than expected in that period, while a calculation that points to a financial profit shows a positive result achieved by the company in the period.
How to Calculate the Break-Even Point?
Many entrepreneurs believe that calculating the Break-Even Point is difficult and costly. But the truth is that calculating the break-even point of a business is a very simple task. For this, the manager simply subtracts the Fixed Expenses of the business by the Non-Disbursable Expenses multiplied by the Contribution Margin.
In the next few paragraphs, you will learn how to calculate, in a simple way, the Financial Break-even Point of your business and keep your company within a positive financial margin.
Why is it worth calculating?
Any company that is interested in reducing business costs and establishing assertive prices for its products and/or services must calculate the break-even point. Entrepreneurs who want to identify the viability of a business or project before putting it into practice can also calculate the Break-Even Point.
In addition to benefiting the business itself, the break-even point calculation allows shareholders, partners and managers of a given company to discover the moment when a product or service will charge its costs – fixed and variable – and will start to generate profits, in fact. That is why it is so important that this calculation is not ignored by any company, regardless of its size.
Calculating the Financial Break-Even Point
Learning how to calculate the Break-Even Point of a business is simpler than you might think. This can be done by anyone who has access to the numbers that are part of the account. Usually, this calculation is done by the administrator or by the company’s finance department team.
As you already know, the Break-Even Point of the business happens when the expenses and profits of a company tie in, there is nothing to pay and no profit to receive. From this point onwards, positive results generate profit, while negative financial results generate losses.
To calculate your company’s break-even point easily, you need to follow a few simple steps. Follow each one of them and find out how to calculate your business’ Break-Even Point within minutes.
1. Identify expenses and contribution margin
The first step to calculate the Break Even Point is to know the costs and expenses – fixed and variable – of your company, in addition to the contribution margin. These data will help you to know the necessary amount of commercialization of a product or service so that the business does not have losses and start to generate profits .
Start by analyzing fixed expenses – necessary for the monthly maintenance of the business, such as employee salaries, rents, consumption bills, among others, and variable expenses, which undergo changes and readjustments periodically.
Then find the contribution margin of the business. This is nothing more than the gross gain on sales of services or products marketed by the company. To find the contribution margin, simply perform the following account:
Contribution Margin = Sales Price of the Product or Service – (Variable Cost + Variable Expenses).
It is important to remember that, in order to make sense in the break-even point calculation, the contribution margin must be presented based on the price and unit costs/expenses of a given service or product, normally appearing as a percentage.
2. Apply the Financial Break-Even Point formula
The second step is precisely to apply the Balance Point formula and perform the calculation itself. This account is made from the sum of fixed expenses divided by the business contribution margin. As shown in the following formula:
Financial Break-Even Point = Fixed Expenses/Contribution Margin.
For the account to make sense it is necessary to present the contribution margin as a percentage. To do this, transform it into a decimal number when performing the calculations.