What is a break-even point: concept, definition and calculation formula with examples

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:39

The profitability of a business is a necessary condition for its existence. It depends on many factors, the consideration of which is necessary for making a decision. What should be the output volume? What are the allowable costs? At what prices will the products be competitive and in demand in the market?

What is the breakeven point. A simple definition

The initial stage of any financial activity is obviously unprofitable. The cost of raw materials or the purchase of goods, the maintenance of storage facilities, the wages of workers must be made before profits begin to come in.

You can't count on income before the mass of sales does not exceed some critical threshold. In the best case, only some costs will be compensated at first, but the overall result will be unprofitable.

It makes no sense to talk about profit at the breakeven point. It is zero.

The volume of sales that equalizes the cost of selling products with the income received is called the pointbreak even (TB). Only achieving self-sufficiency guarantees subsequent profits.

What does TB depend on and what gives

Sales volume is the defining, but not the only factor of its existence. Fixed and variable costs (costs) are the threshold, the achievement of which allows us to say that the unprofitability of the initial stage has been overcome.

The amount and nature of revenue receipts also have an impact on reaching the break-even point of products. Accounting for all dependencies allows the entrepreneur to draw conclusions:

• about the possible profitability of the planned business;
• problems when choosing one way or another to achieve TB;
• on linking sales volume with pricing policy;
• about the existence of options for the implementation of the goals.

You can refer to the break-even point as the edge in sales followed by profit, or as the end of a period of non-profit operation. The essence of this does not change. The main thing is to define it as close to reality as possible.

Success formula

Before you turn on the calculator, you need to firmly understand the difference between fixed and variable costs. The former do not depend in any way on the volume of goods and services sold, while the latter change proportionally after it.

For example, the cost of space heating or equipment repairs will remain the same whether sales increase or decrease. And salaries, energy or components transfer their cost tofinal product directly.

If we designate sales revenue as VP, the difference between revenue and variable costs as RVP, and fixed costs as PZ, then the formula for determining the break-even point will take the following form:

TB=VPPZ / RVP.

Why is that? Consider the ratio of fixed costs to the difference between revenue and variable costs. In itself, the difference is nothing more than a profit from the sale. Hence, the whole ratio is a certain coefficient that changes the amount of revenue in such a way that it appears as a break-even point.

Not clear?

Let's imagine that the coefficient is equal to one. Then TB in monetary terms will be equal to all revenue. That is, with such costs and receipts, this is the desired point. By changing the ratio of expenses and the amount of revenue, we can choose a sales volume that allows opportunities and that meets the wishes.

How to calculate the break-even point is shown in the table.

Data	Business projects			Total
	A	B	С
Sales volume	2 500	1 500	1 600	5 600
Variable costs	1 900	1 280	1 380	4 560
Fixed expenses	800			800
Profit				240

The example analyzes an enterprise thatinitiated three projects, A, B, C. In total, the company made a profit of 240 thousand rubles. This means that the break-even point has already been passed.

Important! Data for projects for which calculation is carried out must refer to the same period.

Since in ruble terms our point is equal to the revenue at which losses stop, it is clear that the smaller the value it takes, the better the businessman, the less he has to wait until the project starts to pay off.

Not a single point. Something is missing here

It would seem that the company's position in the market can be unambiguously determined by the break-even point. The company stands on its feet the stronger, the less revenue required for profitable work. And there is. But only in the case when projects and objects of analysis approximately equal in cost are compared.

In a shoe shop where the shoemaker and his assistant work, the break-even point can be several thousand rubles. And for a small grocery store, a few thousand is no longer money. What can we say about large companies and corporations?

They may break even with millions and billions, but this does not mean at all that their situation is as many times worse than in a shoemaker's shop. What is missing in the wording, what is the break-even point, so that it can serve as a comparison between different representatives of the business community?

Size matters

Obviously, a corporation with worldwide sales is much more stable than a small business. But TBthinks it is not. You can rely not on the amount, but on its share in the total turnover. Then it turns out that giants are much stronger than dwarfs, as it is in reality.

The formula that calculates the strength of the financial position is very similar to the TB formula. Sometimes they are called sisters. They involve the same actors: sales revenue, variable and fixed costs of the break-even point. It's called a margin of safety (ZP) and looks like this:

ZP=(VP - TB) VP.

Here we are talking about the share of revenue remaining after deduction of the break-even amount in the total amount of money received. It is no coincidence that it is called a margin of safety. The greater the share of money outside the yield frontier, the stronger the position in the market.

Better than formula

There is a way to define TB, in which all of the above is presented in a visual form. This is a chart. It is built on the values of the same formula or function, mathematically speaking. Therefore, the data for its construction are already listed above:

breakeven point volume;

fixed and variable costs

To build a graph, you need two axes: abscissa and ordinate. The first is horizontal. We set aside the volume of sales on it. The second, vertical, serves to indicate costs.

The sloping line passing through the origin is the revenue graph, the horizontal line is fixed costs, the second sloping line is variables. The intersection of revenue andtotal cost is the break-even point. Gross costs, that is, the sum of fixed and variable costs of the break-even point, is expressed by raising the line of variable costs by the amount of fixed.

You can clearly see how the profit is growing relative to gross expenses, as well as the margin of safety. Different forms of presentation of information complement each other and provide a better understanding of the process of formation of economic indicators.

Important! The break-even point can be expressed as a sum, quantity or percentage. The choice of one or another method depends on the circumstances and tasks of the analytics.

Deeper analysis

All formulas and graphs based on them give quite satisfactory accuracy when it comes to one product. But what if there are several projects launched, as often happens in life?

If you combine revenues and expenses from different industries into one, the overall picture will be drawn correctly. But behind the façade of the overall well-being of all projects, those of them that either do not give an estimated profit or generate losses can be hidden. The question arises: how to evaluate each contribution to the common cause separately?

That is, in the question of what is the break-even point, we are talking about the calculation separately for each component of production or trade. If the components of revenue are mostly known, then it can be difficult to separate costs, especially fixed costs. Usually they do this: all expenses are divided among projects in proportion to revenue.

As usual - does not mean right

But herethe analyst again steps on the same rake: puts in one heap what should lie separately. This problem is solved by decomposing fixed costs for each product line. For example, one workshop is used to produce pencils, while fountain pens are made in another workshop.

The cost of depreciation, electricity, heat in this case can be calculated separately. The rest of the costs, which cannot be distributed, are treated as indicated above: they are divided in proportion to the proceeds from the products.

Analysis by components is more accurate and contributes to making the right management decisions. But he is more difficult. Instead of one or two formulas, you will have to apply the number of calculations, which will be a multiple of the analyzed factors. The same applies to charts. Instead of straight lines, curves will appear that will combine the data of individual segments.

Applicability conditions

There are a number of circumstances for the calculation of the break-even point and subsequent analysis to be effective and contribute to the economic growth of the company:

• regularity;
• calculation for the enterprise as a whole and for individual projects;
• sustainability;
• financial adequacy.

Each of the points is quite simple and does not require detailed explanations. What is a break-even point? The type of analysis that should be carried out at the time of the appearance of the accounting data, for example, every month, quarter or year. Omissions significantly reduce the reliability of information.

When the enterprise is in a fever, in times of reorganization and change,no analysis can be accurate. Sufficiency of finances is necessary to reliably cover all needs and payments. The lack of money leads to violations of stability, the negative impact of which was noted above.

Analyst tools

The formulas for calculating TB and safety factor are quite simple and calculations can be done even manually on a piece of paper using a multiplication table. But the scope of such calculations is small: a small workshop, a trading kiosk. If they do this kind of analysis at all.

In other cases, you can't do without convenient and reliable tools. The most common program is the well-known Excel. It can be used to calculate a formula, create a table and display a chart.

Most serious accounting programs also allow you to avoid routine and focus on analysis. This is the family of accounting systems of the company 1C. Version 8.3 of the domestic product provides an excellent opportunity to determine the break-even point of the enterprise and combine the influence of many factors to achieve the desired financial result.

For not very complex cases, there are online services for a variety of calculations. They provide their services both on a paid basis and free of charge.