To build a correct and profitable business, you will have to know your break-even point, due to the importance of this point, which means that the total revenues are equal to the total costs, that is, the absence of loss or profit, which may help you in making some decisions regarding the selling price and also provide you with an adequate vision for the situation. Your sales budget as well as preparing a good business plan.
What is the break-even point? Break-Even Point?
The break-even point can be defined and applied in several different contexts. In the field of trade, we find that the break-even point is the equality of two prices after comparing the market price with the cost. In the field of accounting, the break-even point is the level of production in which the total revenues are equal to the expenses for a product and it is calculated by dividing Fixed costs over revenues and subtract variable costs to give you the correct calculation of the break-even point.
How is the break-even point calculated? Break-Even Point?
There are many formulas for the break-even point, as we mentioned previously, that can help you calculate the break-even point for your business. There are methods that depend on the units sold and others that depend on the points achieved by sales. Below are the methods for calculating the sales point.
- Calculate point of sales based on units sold
The sales point is calculated from the fixed costs section for each unit, which does not change with the number of units on revenues, and it depends on the price of the product. Then we subtract from it the variable costs for each unit, which represent the materials used and labor. Thus, the equation for calculating the break-even point for the units sold is: In the following formula:
Break-even point = costs ÷ (revenue – variable cost)
- Calculate the break-even point based on sales points
Calculating the break-even point in this case depends on the fixed costs and the contribution margin. Before explaining the method for obtaining the break-even point, the fixed costs and the contribution margin must first be defined.
- Fixed costs
These are costs that are not affected by the number of sales. They are costs that are paid regardless of the increase or decrease in sales, such as: equipment and facilities for the production process, as well as any process involved in making the product.
- Contribution margin
The contribution margin is the calculation resulting from subtracting variable costs from the selling price. The profit margin includes fixed costs and profits, through which fixed costs are covered and the remaining funds are profits. Calculating the contribution margin enables you to know the steps you can take to achieve break-even.
The break-even point is calculated by dividing the fixed costs into the contribution margin, meaning:
Break-even point = Fixed costs ÷ Contribution margin
The importance of knowing the break-even point
After knowing the Break-Even Point, you will be able to determine the next step to improve your business plan and achieve break-even. The break-even analysis will show you whether your plan is going well or not and what you need to reach the break-even point, whether it is an increase in the selling price or a reduction in costs. And whether your products will succeed in the market or not, here lies the importance of knowing the break-even point, as it is best to calculate the break-even point before launching your business project to calculate all the points and know the volume of sales you need and how to sell your products. Also, the break-even point greatly benefits companies when launching. A new product where a break-even analysis is performed and whether the expected profit is worth the production costs.
Break-even point analysis is also the best way to know the minimum sales, which helps the company avoid losses, which makes the break-even point a powerful tool used for planning and decision-making. Below is a set of features and benefits that you can gain through break-even point analysis.
- Better product pricing
Knowing the break-even point helps you price your products in a better and smarter way by knowing the impact of the price on future profit margins.
- Full coverage of fixed costs
Break-even point analysis will help you know the fixed cost values and cover them.
- Avoid the appearance of uncovered financial obligations
- Define sales goals more clearly, which makes it easier for you to follow up and market them.
- Make correct and effective decisions for the benefit of your business
- Avoid financial risks for the company
When is break-even analysis used?
For example, but not limited to, we explain below some scenarios in which you can use Break-Even Point analysis.
1. Launching a new business
If you are about to launch a new business, you will have to conduct a break-even point analysis to achieve the success of your business. Through the break-even point analysis, you can know the success of the business idea, set realistic and appropriate costs for the idea, and determine an appropriate pricing strategy.
2. Producing a new product
If you are in the process of creating a new product, you must first conduct a break-even point analysis to find out all the variable costs, determine the price, and know the extent of the market’s acceptance of the new product.
3. Adding a new marketing channel
If your marketing plan was successful and you wanted to open a new marketing channel, you must know the break-even point and achieve it so that you do not make the mistake of financial pressures that may put the rest of your marketing channels at risk.
Therefore, knowing the Break-Even Point is one of the most important points that you must know if you own a business or want to launch a new business, so that you can make the right decisions to maintain the success of your business and plan well for the future.
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