When an entrepreneur starts a business, he is aware that the profits come after focusing on providing superior quality in his products and services. This is how you meet the needs of your target audience.
Then you must define the contribution margin to know your operating expenses and also the profitability of the product or service. This is vital to calculate the equilibrium point of the company, since companies have to ask themselves the question of how much they have to sell to cover those expenses and costs, and what is the sales value they must achieve to cover operating expenses and the production process.
If you are about to start or want to run your organization correctly, see everything you need to know about the business breakeven point. In this way, you will know the profitability of your services or products and where to go to start making profits.
What is the business breakeven point?
The breakeven point is a term used to define when a company covers its fixed and variable costs. In other words, it is when income and expenses are at the same level and therefore there are no gains or losses.
It is necessary to emphasize that the breakeven point is not a finish line. Rather, it is a new starting point for companies to have greater confidence in their products or services. This calculation is not done just once, since the income calculation and the annual contribution margin are periodic measurements.
Similarly, the breakeven point can be calculated in the short term (weekly, monthly, bimonthly or quarterly). This helps to maintain stability throughout the year of the production process and to reach the goal.
What is the breakeven point for?
Calculating the business breakeven point will allow you to evaluate the profitability of a business. This way your company will know how much it needs to sell to generate profits.
It also works to confirm if your entrepreneurial idea will suit financially, so it is essential in any business plan.
Another point in favor is that you will have the basis of a contingency plan in case of low seasons. Thanks to this analysis, negative surprises are diminished or can be dealt with more quickly and effectively. In addition, you will observe the growth of your company over time.
How to calculate the breakeven point of a company?
To calculate the breakeven point it is necessary to know the fixed and variable costs. These data can be obtained on an annual, monthly or quarterly basis. The calculation is made based on the percentage of gross margin applying the general formula: breakeven = (costs) / (percentage of gross margin).
In addition to this general formula, there are some variants with which you can get your break-even point. We share them below.
Formulas for calculating the breakeven point
The two main factors that you should know are your fixed and variable expenses, with which the total costs will be obtained.
- Fixed costs: they do not change from month to month and their value is always the same.
- Variable expends: vary according to what is billed month by month. Its relationship is direct with the number of sales, so if these increase, the variables will also increase.
To better understand the concept, some examples of variable expenses can be sales commissions, labor, raw materials, among others.
- Total costs: is the sum of fixed and variable expenses. With this, the equilibrium point can be deduced; in other words, when revenues are equal to total costs.
One of the ways to calculate the breakeven point is per unit, in which the unit variable price must be obtained by dividing the variable costs by the number of units sold in a given period.
The result of this formula is called “contribution margin”, that is, the difference between the volume of sales and the variable costs, or in the same way, the profits of a company without considering the fixed costs.
For example, if a company sells a product with a value of $ 50, the unit variable price is $ 25 and the fixed costs add up to $ 12,500, the calculation should be:
Unit break-even point = 12,500 / (50 – 25) = 500
What this operation deduces is that the company must sell 500 units (products) to obtain its unit breakeven point.
Equilibrium point calculation example
When first calculated, a company’s breakeven point may seem more complicated than it actually is. Everything is a matter of practice! To help you, we share an example of how to use this operation when you need to present it in a report:
A company that sells folders sets the price of each one at $ 60. The variable cost for each is $ 20 and the company’s fixed costs amount to $ 40,000. So, to find out how much the company has to sell to cover its total expenses, the fixed costs are divided by what arises from the price minus the variable costs:
As you can see later, the result is 1,000, which means that the company’s breakeven point will be achieved by selling 1,000 units. To verify this, we obtained the profits with the following formula:
= (Price * Break-even point) – (Variable costs * Break-even point) – Fixed costs
The result will be 0 since the company makes neither profit nor loss. In other words, the company has managed to break even.
How to graph the breakeven point?
- Create a table in Excel.
- Select the table with the data.
- Insert the graphic.
1. Create a table in Excel
To graph these results, we create a four-column table in an Excel spreadsheet containing the number of units (column A), sales (B), costs (C), and profits (D).
We multiply the units and sales by the unit price with the formula = A9 * $ B $ 2
The costs are obtained with the sum of the variable fixed costs corresponding to the units produced with the formula = $ B $ 1 + (A9 * $ B $ 3)
2. Select the table with the data
Since you know the profits with the difference between sales and costs, it is time to graph. To do this, just select the table with the data, go to the “Insert” menu and choose the graph that you think is most convenient to effectively project the results.
3. Insert the graphic
First select the table with the data, go to the “Insert” menu and choose the graph that you think is most convenient to effectively project the results.
With this graph, it is clearly represented that:
- The lines “Sales” and “Costs” meet at a point of intersection and at that point sales increase.
- The “Profits” line crosses horizontally and indicates that from the 1,000 units sold, a profit begins to be obtained.
And when a company has reached the breakeven point, you will surely ask yourself: what is next? You will see if the business is making a profit. Keep in mind that variable costs increase, so the values at different times may vary. This is important to consider so that you do not have the wrong idea of the value of the win.
To avoid this confusion, we recommend that you calculate new breakeven points each time the variable costs are very different from each other.
Remember that planning and good organization are the keys for your company to head on a successful path. This management tool will help you anticipate the loss of money and create action plans in case of any eventuality. This way you will maintain financial stability to grow steadily.