What is breakeven point

The break-even point is often mistaken for the payback point, but these two concepts are completely different in nature. If the payback is expressed in months and indicates the time when the cost of the enterprise will be returned by the project manager, then the break-even point is something completely different. Each organization has such a volume of products, realizing which, it does not receive income, but it also does not bear costs.

At this point, each additional unit of the sold product is already beginning to make a profit. It is this indicator that is called the break-even point. The break-even point formula is quite simple. It can be calculated both in terms of output and in monetary terms. When calculating in monetary value, it is calculated, first dividing the value of the product by the profit from its sale, and then it is necessary to divide the value of the fixed costs by the result obtained.

If the breakeven point is calculated in units, then it is calculated by dividing the value of the fixed costs of profit from the sale of the goods. Calculating this indicator is very important. If the payback (profitability) of an organization can have an unclear expression (optimistic and pessimistic plan), then the breakeven point is calculated clearly. It has an exact expression without approximations. This indicator solves a number of problems and has several functions. First of all, it shows whether it is worthwhile to start production or another business. After all, market laws work always, regardless of what plans the entrepreneur has.

If the market is too narrow or there are a large number of similar products on it, then the company simply can not reach the break-even point and certainly will not make a profit. Therefore, we must calculate everything in advance. Revenue depends on the value of the product and the volume of sales. The break-even point allows you to calculate and adjust these indicators. If one of them changes, then the second one can be changed. However, the minimum indicator is always the one that is marked as a break-even point of the enterprise. If the company sells more products than is noted in this indicator, then it speaks about profit. The size of the profit is also calculated based on this factor.

In the break-even point, all the costs incurred by the firm are calculated. This is the cost of purchasing products, and taxes, and wages to workers or sellers. If the proceeds can cover all these points, it means that the same zero position is reached when the firm becomes self-supporting. Work in the break-even point has no definite meaning. It is important for an entrepreneur to obtain income from the business being launched. Therefore, before the organization of the case, it is necessary to determine precisely whether the company will be able to cross this line.

In order to correctly determine this indicator, we must ask one simple question: where is the threshold at which the company will cease to make a profit, but will not suffer a loss. It is known that when the sales of products decrease, the costs also become lower. Therefore, it is important to calculate every detail that will affect the profitability of the organization. This threshold is for all firms. Entrepreneurs who organize the company, focusing on the mind, and not under the influence of desires, very carefully calculate the risks. And those who are susceptible to emotions often turn out to be squeezed out of the market. The break-even point, like the profitability point, is a very important indicator in the business plan. Investors and other possible sponsors of the project pay close attention to it, for which the payback of investments and risks is very significant. At the same time, the businessman should be able to justify his conclusions that the company will be able to cross the threshold of break-even existence.