Break even point is the English equivalent for “break-even point”. This expression is used to designate the precise value of a company’s financial statement. The amount of revenue must be greater than fixed and variable costs. That is, how much you need to achieve to cover all costs, not to mention profit.
Finding financial balance is undoubtedly important for any organization – and you know it.
Having security and tranquility to deal with the demands and challenges of management are fundamental elements to be able to stand out in such competitive markets.
However, we know that it is not always easy to keep the numbers in order. But we all agree that it is extremely important, right?
It is in this context that the break even point enters. This is a fundamental indicator for those who want to have finances always balanced in their business.
Today’s article will talk about what exactly this tool is and how it can be applied in companies.
We will also address the importance of finding the balance point within each organization, regardless of the segment and its size.
After all, what is break even point?
A break even point, the break even point is the designation for financial and accounting equivalence of a company.
It is, without a doubt, a good practice within the financial management of any business.
It occurs in the context where total revenues and expenses – fixed and variable – are equivalent. That is, when there is neither profit nor loss for an organization.
In simple terms:
- Monthly revenue: R $ 35 thousand
- Monthly expense: R $ 35 thousand
- Balance: R $ 0.00.
It is possible that you put this tool into practice without knowing what, in fact, you are doing. However, when the financial breakeven point is reached, you are ready to start making a profit.
Failing to lose is the first point to start winning.
Applying this agreement will indicate the investment margin of the business. And there, it can be either in the production of a product or service.
It also doesn’t matter if you are a startup or a large industry. The modus operandi is the same: to seek balance.
When the calculations you make show that you have reached break even, then it means that you have had neither profit nor loss.
In football terms, we could say that you were in the famous “0x0”, right?
And, of course, if the breakeven point points to a financial loss, it means that the company had a lower turnover than expected in the period that was calculated.
Otherwise, if it shows a profit, it means a positive result achieved in the same period.
Why is break even important for companies?
Balance is fundamental in life, right? In everything we do basically. So, why would that be any different when it comes to administrative management in companies?
To understand the importance of break even is to accept that not having a profit is not always a bad situation.
It’s like we said earlier: the first step in starting to win is to stop losing. By curing existing defections, you have a paved path to grow.
The importance of this indicator lies precisely in allowing it to be efficient and effective in monitoring the financial situation of its businesses.
Of course, this is not easy and, in times of crisis, even less. Sometimes it is necessary to take drastic and unwanted measures to keep the numbers healthy and keep the company viable.
After all, it is clear that within a business management, there are several details and obligations to be fulfilled.
Entrepreneurship is not an easy task. This mission requires, above all, study, preparation, resilience and why not a certain coldness to make some decision-making.
So, in such contexts, knowing the break even is even a necessity to survive.
You will be able to know, after balancing your finances, when – and also in what way – your company will start to profit.
That’s because you will have a sense of how and how much to increase sales to achieve the goals and objectives you have set.
The break-even point for startups
If break even is important for companies that are already consolidated and have been operating for years, imagine who is starting.
It is common for businesses that are starting to take a while to start giving a return on their investment – famous ROI.
Injection of new capital, incidentally, is also frequent to ensure that the startup not only grows, but also remains healthy.
The intention, in these cases, is precisely and primarily to find the desired financial balance point.
It is – and you now know – the initial and necessary step that all managers want and need to look for.
Knowing the zero point, it is possible to create a strategic plan to start growing and stand out in the market.
This will determine the marketing strategies to be used and will also direct the company to the sales methodology that makes the most sense.
All of this, of course, having the organization’s ideal customer profile (ICP) well defined.
Especially because, if these homework were not done well, you will lose money having a larger CAC and sales cycle.
And that will inevitably be reflected in your break even and some steps backwards will need to be taken.
How does break even work?
The break even point can be seen as both a turning point – where you stop making a loss and go to profit – as an initial stage to really grow.
So understanding how to find that balance point involves some important factors.
It foreshadows two very different scenarios, positive and negative. And both turn on alerts for anyone running a business.
The company’s bankruptcy goes through periods of break even triggered by several factors that burden the operation.
Likewise, good practices help pave the way for business growth and expansion.
That said, we have separated two points that will help you understand – before calculating – how the break even point works.
They are, in reality, two simple steps. But it is necessary to have them very clear so that you are assertive when taking any action off the paper.
1 – Identify contribution margins and also expenses
The first mandatory step to know the financial break-even point is to have full knowledge of the costs and expenses that your company has.
And here, again: all costs come in. Be it fixed or variable. In addition, of course, the contribution margin. All of this needs to be encompassed.
This will help you understand how much more you will need to not only produce but also sell.
In this way, you will reverse a scenario of loss, or else of stagnation, and will start to grow.
Do this by analyzing fixed expenses initially. Employee salaries, payment of sales commission, rent, consumption bills, taxes, etc.
Then, analyze the variables, those that are not always present or that suffer really big changes and adjustments.
Then find the contribution margin of the business. That is, the gross gain from sales of your company’s products or services.
Here, take into account the unit price of what was sold. To do this, apply:
- Contribution Margin = Price of Sale of Service or Product – (Variable expenses + Fixed expenses).
To help you be more agile and get organized, use the technology that an ERP and sales CRM bring.
Digital transformation is essential for you to have these numbers organized and in an agile way.
In addition, you prevent any human error – a wrong number, for example – from compromising the entire calculation and operation.
2 – Apply the financial break-even formula
The second step is the application of the break even point formula. We separate a chapter below just for that to explain better.
Here, the important thing is to emphasize that the account will be made from the sum of expenses divided by the contribution margin.
For the account to make sense, present this margin as a percentage. Therefore, make it a decimal number before calculating.
- Financial Breakeven Point = Fixed Expenses / Contribution Margin.
How to calculate break even? See practical examples
The calculation of the financial break-even point, although it may seem complex, is quite easy to do.
The formula you saw earlier, as well as the elements that need to be in it.
Let’s put some numbers here and make this a more practical example, considering an entire year.
- Total Revenue = R $ 100 thousand;
- Variable Cost = R $ 60 thousand;
- Fixed Cost = R $ 20 thousand;
- Contribution Margin = R $ 30 thousand
Now, it’s time to find the Contribution Margin Index. This will be done as follows:
- Contribution Margin / Total Revenue. So, 30/100 = 0.3. This is the Contribution Margin Index.
So, now it’s time to find the financial break-even point. It will be calculated like this:
- Fixed Cost / Contribution Margin Index. Therefore, 20,000.00 / 0.3 = R $ 67 thousand (rounding).
This will be the amount that the company will need to reach to cover all expenses that it has – variable and fixed. Anything that exceeds this margin will be considered a profit.
How much to sell to grow?
Let’s say that your startup sells products at a price of R $ 50. Adding the unit and variable production costs, you get a value of R $ 25.
Therefore, the contribution margin is R $ 25. This gives 50% of the sale price.
Now, you need to collect information about your fixed expenses and also depreciation.
So, let’s say you have a fixed expense of R $ 50,000 annually. Of these, R $ 5,000 refer to depreciation of goods and equipment.
Thus, the formula applies:
- Financial Breakeven Point = (R $ 50,000.00 – R $ 5,000.00) / R $ 25
The result of this will be: 1,800 units.
This value shows how many units of products you will need to sell in the next 365 days to start making a profit.
And, to help you in this mission, leave everything registered in your sales system to have, in a clear and didactic way, the predictable revenue of your business.
So, selling more and better and having information security to make the best decisions will no longer be a problem
So, how can we help you?
If you were unsure about the content or want to know how a CRM helps your company, talk to a consultant today.
Enjoy and read two articles that will help you better manage your business and his financial health.
The first talks about quality management, something so important within companies to produce more and better.
The second addresses the benefits of applying the Theory of Constraints to correct problems in companies.
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