The break-even point in business is when a company's total expenses equal its total revenues. This point is when the business is not profitable and does not incur losses. Let's take a closer look at it.
You may have seen a business negotiation unfold on the American reality TV show, "Shark Tank." The multi-millionaire investors, or'sharks, will ask potential investors about their current business status. They use jargons you may not have heard before to get the information they need. Sharks ask business owners whether they are profitable and, if so, when they will reach break-even. What does this mean? Let's see.
The break-even point, or BEP, is the point at which all costs and expenses are incurred by a business owner in order to operate a business. It is also the point where total revenue or sales from the business are equal. This is when the firm has no net profit but does not suffer any losses. This basically means that business owners are able to return all their investment. A business can only grow in profit if it reaches the break-even point. Therefore, the first goal for any business is to get to the break-even point. After that, they can begin profiting.
The break-even point, as mentioned earlier, is the point at which a company's total expenses and total revenues equal. It is a number that a business relies on. You can calculate your BEP as a business owner by looking at all of your costs, from rent to salaries to labor costs to materials used in manufacturing the product. Also, you need to examine your pricing structure. After you have done this, you can evaluate whether your prices are too high to reach break-even and whether your business will be sustainable.
Two formulae help determine your business's break-even point. These formulae are:
1. Formula based upon the number of product units
Divide the cost by the unit revenue to calculate break-even. Add the variable cost per unit. No matter how many units are sold, fixed costs will remain the same regardless of whether they have been reduced or increased. The revenue, on the other hand, is the price at which products are sold after deducting variable costs like labour and material.
Units Break-Even Point = Fixed Costs / (Revenue per Unit - Variable Cost per Unit)
2. Formula based upon sales in rupees
Calculating the break-even point using sales in rupees requires you to divide the fixed cost by the margin for contribution. This can be done by subtracting variable costs from product price. This amount will be used later to cover the fixed costs.
Break Even Point (sales per rupee) = Fixed Costs/ Contribution Margin
The Contribution Margin = Product Price - Variable Costs.
Analysis of the components in the BEP
1. Fixed costs:
Fixed costs are not affected by how many units are sold. Rent for production units and stores, as well as costs associated with data storage and calculations, are all examples of fixed costs. This includes fees for services like design, graphic, and advertising.
2. Margin of contribution
The contribution margin is calculated by subtracting the product's variable costs from the selling price. If you sell a product at Rs. 100, and the labour and material costs are Rs. 35. Your contribution margin will be Rs. 65 This money is used to pay fixed costs. Your net profit is the money that remains after you have paid fixed costs.
3. Ratio of contribution margin
You get a percentage when you subtract contribution margin from fixed costs. This is the contribution margin ratio. It helps you decide what steps you should take to reach break-even.
4. At the break-even point, earning profits
When sales are equal to fixed and variable costs, then you have reached break-even. After that, your company can report net profits or net losses in the amount of Rs. 0.
The break-even point is an important milestone for any business. Any sales above the BEP will be considered net profit. It is not always an easy road to reach the BEP. It may take months for some businesses to reach break-even. Others might spend years.