Calculating Break-Even Point Of A Business

By definition, the break-even point represents the point where total revenue is equal to the total costs incurred by the business.

There are three profitability levels of a company. The first is that the company actually makes profits from its business venture. The second is that it makes a loss, and the third is that it breaks even.

Whether you want to invest in a business or you have a business venture you want to run by yourself, knowing the line between profit and loss is essential. The break-even point shows you the level of profit required to make to recoup your profit, when, and whether or not it is worth investing in, in the first place.

In other words, while you might not be making a profit, you will also not be making a loss. By definition, the break-even point represents the point where total revenue is equal to the total costs incurred by the business.

Importance Of BEP For The Business Owner

For the business owner, this is the exact point where the expenses made because of the said business is the same as the income made for it. In economics, the chart simply shows you the window you have before things go bad. This window is what is known as the margin of safety.

In essence, revenue earned can fall all it wants, but it should cross that point of break-even. This thus shows you how much loss you can afford or the business can afford before it is termed an unprofitable venture.

Another way this analysis can help you is in price-setting. You might want to sell below the overall market in order to have a competitive edge. However, the breakeven will serve as a key reference in making that decision as there is a minimum price that you must sell at in order to make neither profit nor loss.

It also helps you identify your fixed and variable costs so that you can control them effectively.

Importance Of BEP For The Investor

For the investor, the break-even point also has its benefits. Broadly, this analysis will show you the point where your invested capital will generate a positive return and where it crosses that line.

It shows you the price you at which you will break even on any investment or any trade. While it might not be easy to calculate with stocks because of the many variables involved, it is great where you are buying options or any fixed-income security.

You can also use it to compute the viability of investing in a company. If, for example, a company has taken too many loans and is heavily indebted, you have to determine whether it is still safe to invest in the company and at what point it will start making profits based on its revenue generation or whether the operations in its entirety needs to stop.

Formula For Calculating BEP

The formula for computing BEP is: Fixed costs divided by contribution margin. Depending on what you’re calculating, this can be expressed in terms of total revenue or in terms of unit sales in a product company.

To determine the Contribution Margin, subtract variable costs from sales. (Sales– Variable Costs).

With this, you will be able to determine where the safe place of your investment lies.

Written by Lawretta Egba.