CONTENT ON MANAGEMENT AND PRODUCTIVITY .
Break even point is the English equivalent of “break even point”. This expression is used to designate the precise value of a company’s financial statement. The amount of revenue needs to be greater than fixed and variable costs. That is, how much you need to reach to cover all costs, not to mention profit.
Finding financial balance is undoubtedly important for any organization – and you know it well.
Having security and peace of mind 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’s something 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 always balanced finances 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 discuss the importance of finding the balance point within each organization, regardless of the segment and its size.
After all, what is break even point?
Breakeven point, the break even point is the designation of a company’s financial and accounting equivalence.
It is, without a doubt, a good practice in the financial management of any business.
It occurs in a 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: BRL 35 thousand
- Monthly expense: BRL 35 thousand
- Balance: R$0.00.
It is possible that you put this tool into practice without knowing that you are actually doing it. However, when you reach the financial breakeven point, you are ready to start making a profit.
Stopping losing is the first point to start winning.
Applying this concept will point out the business’ investment margin. And then, it can be either in the production of a product or service.
It also doesn’t matter if you are a startup or a big industry. The modus operandi is the same: seek balance.
When the calculations you make show that you have reached break even, then it means that you have neither made a profit nor a loss.
In football terms, we could say that you were in the famous “0x0”, right?
And, of course, if the break-even 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 you point to profit, it means a positive result achieved in the same period.
Why is break even important for companies?
Balance is key in life, right? In everything we do basically. So, why would this be different when it comes to administrative management in companies?
Understanding the importance of break even is accepting that not making a profit is not always a bad situation.
It’s like we said before: the first step to start winning is to stop losing. By remedying existing defections, you have a paved path to grow.
The importance of this indicator lies precisely in allowing for efficiency and effectiveness in monitoring the financial situation of its businesses.
Of course, this is not easy and, in times of crisis, even less so. Sometimes, it is necessary to take drastic and unwanted measures to keep the numbers up to date and keep making 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 coolness to make some decisions .
So, in contexts like this, knowing the break even is even a necessity to survive.
You’ll be able to know, after balancing the finances, when – and also how – your business will start to profit.
That’s because you’ll have a sense of how and how much to increase sales to achieve the goals and objectives you’ve set.
The break-even point for startups
If for companies that are already consolidated and with years of operation, break even is important, imagine for those who are just starting out.
It is common for businesses that are starting to take a while to start giving a return on the investment made – the famous ROI .
Injection of new capital, by the way, is equally frequent to ensure that the startup not only grows but stays active in a healthy way.
The intention, in these cases, is precisely and first to find the much desired point of financial balance.
It is – and you already know by now – the initial and necessary step that all managers want and need to pursue.
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 use and will also direct the company to the sales methodology that makes the most sense.
All of this, of course, with the organization ‘s ideal customer profile (ICP) well defined .
After all, if these homeworks were not done well, you will lose money having a larger CAC and sales cycle .
And this will inevitably be reflected in your break even and some steps back 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 drive a profit – and an early stage to really grow.
Therefore, understanding how to find this balance point involves some important factors.
It is a harbinger of two very distinct scenarios, positive and negative. And both light alerts for those running a business.
Company bankruptcy goes through break even periods triggered by several factors that burden the operation.
Likewise, good practices help pave the way for business growth and expansion.
That said, we’ve separated two points that will help you understand – before calculating – how the break even point works.
It’s actually two simple steps. But it is necessary to have them very clear so that you can be assertive when taking any action from the paper.
1 – Identify contribution margins and also expenses
The first mandatory step to know the financial breakeven point is to have full knowledge of the costs and expenses that your company has.
And here again: all costs enter. Either fixed or variable. In addition, of course, to the contribution margin. All of this needs to be covered.
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 start to grow.
Do this by initially analyzing fixed expenses. Employee salaries, payment of sales commission, rent, consumption bills, taxes, etc.
Then analyze the variables, those that are not always present or that undergo really big changes and readjustments.
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 the Service or Product – (Variable expenses + Fixed expenses).
To help you be more agile and organized, use the technology that an ERP and a CRM for sales bring.
The digital transformation is critical for you to have these organized and agile numbers.
Furthermore, you prevent any human error – a wrongly typed number, for example – from compromising the entire calculation and operation.
2 – Apply the financial breakeven formula
The second step is the actual application of the break even point formula. We separate a chapter below just for that to explain better.
Here, it is important to point out 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 Break-Even 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 be done.
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 = BRL 30 thousand
Now, it’s time to find the Contribution Margin Index. This will be done as follows:
- Contribution Margin / Total Revenue. Hence, 30/100 = 0.3. This is the Contribution Margin Index.
So, now it’s time to find the financial breakeven. It will be calculated like this:
- Fixed Cost / Contribution Margin Ratio. Therefore, 20,000.00/0.3 = R$ 67 thousand (rounded up).
This will be the amount that the company will need to reach to cover all the expenses it has – variable and fixed. Anything beyond this margin will be considered profit.
How much to sell to grow?
Let’s say that your startup sells products at the price of R$50. Adding the unit and the variable production costs, we arrive at the 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 that you have, annually, a fixed expense of R$ 50 thousand. Of these, R$ 5 thousand refer to the depreciation of assets and equipment.
Thus, the formula applies:
- Financial Break-Even Point = (BRL 50,000.00 – BRL 5,000.00) / BRL 25
The result of this will be: 1800 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.
Thus, 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 have questions about content or want to know how CRM helps your business, 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 for companies to produce more and better.
The second addresses the benefits of applying the Theory of Constraints to correct problems in companies.