Break Even Point: how to calculate your company’s financial break-even point

Good financial health and the financial balance of any company are but indispensable to the practice of a good business that progressively assumes a solid position in the market—one of activity it can be. The big problem is that putting things in order is not always that easy for the entrepreneur. And here is where the concept of financial Break-Even Point and its importance starts to come into play. Do you know how to calculate your company’s Break Even Point?

The good news is that today, there is a series of instruments and tools that help with this. With them, the manager will be able to maintain his company healthy and will be able to manage it with efficiency. Among them is the Financial Break Even Point indicator. It should never be ignored in day-to-day business.

In today’s article you will understand what the Financial Breakeven Point is and its importance for every business. You will also discover how to calculate your company’s Break Even Point without much difficulty. Follow along!

What is the Break Even Point?

The Break Even Point for the company is nothing more than an indicator used to measure the limit between a company’s profit and loss during a certain period. The Balance Point is precisely the point at which a company’s total revenues and expenses are equal in a given calculation period.

The Breakeven Point indicates a financial loss when the revenues were lower than expected in that period, while the calculation that points to a financial profit demonstrates the positive result achieved by the company in the period.

How to calculate the Break Even Point?

Many entrepreneurs believe that calculating the Break Even Point is difficult and costly. But the truth is that calculating the Break-even Point of a business is a very simple task. To do this, the manager simply subtracts the business’ Fixed Expenses from the Non-Disbursable Expenses multiplied by the Contribution Margin.

In the next paragraphs you will learn how to calculate, in a simple way, the Financial Break-Even Point of your business and keep your company within a positive financial margin.

Why is it worth calculating?

Any company that is interested in reducing business costs and establishing assertive prices for its products and/or services must calculate the Break-Even Point. Entrepreneurs who want to identify the viability of a business or project before putting it into practice can also calculate the Break Even Point.

In addition to benefiting the business itself, calculating the Break-Even Point allows shareholders, partners and administrators of a given company to discover the moment at which a product or service will cover its costs – fixed and variable – and will actually begin to generate profits. . That is why it is so important that this calculation is not ignored by any company, regardless of its size.

Calculating the Financial Break-Even Point

Learning how to calculate the Break Even Point of a business is simpler than you might think. This can be done by anyone who has access to the numbers that are part of the account. Normally, this  calculation is made by the administrator or by the company’s financial department team.

As you already know, the Break Even Point of the business happens at the moment when a company’s expenses and profits equalize, with there being nothing to pay and no profit to receive. From this point on, positive results generate profit, while negative financial results generate losses.

To easily calculate your company’s break-even point, you need to follow a few simple steps. Follow each one of them and discover how to calculate your business’s Break Even Point in just a few minutes.

1. Identify expenses and contribution margin

The first step to calculating the Break Even Point is to know your company’s costs and expenses – fixed and variable –, in addition to the contribution margin. This data will help you know the necessary amount of sales of a product or service so that the business does not incur losses and starts generating profits .

Start by analyzing fixed expenses – necessary for the monthly maintenance of the business, such as employee salaries, rent, utility bills, among others, and variable expenses, which undergo changes and readjustments periodically.

Next, find the business’s contribution margin. This is nothing more than the gross gain on sales of services or products sold by the company. To find the contribution margin, simply do the following calculation:

Contribution Margin = Sales Price of the Product or Service – (Variable Cost + Variable Expenses).

It is important to remember that, in order for it to make sense when calculating the Break-Even Point, the contribution margin must be presented based on the price and unit costs/expenses of a given service or product, normally appearing as a percentage.

2. Apply the Financial Breakeven Point formula

The second step is precisely to apply the Breakeven Point formula and carry out the calculation itself. This account is made from the sum of fixed expenses divided by the business’s contribution margin. As the following formula shows:

Financial Breakeven Point = Fixed Expenses/Contribution Margin.

For the account to make sense, it is necessary to present the contribution margin as a percentage. To do this, transform it into a decimal number when performing the calculations.