Break-even formula in money terms: application examples

What is the break-even formula in terms of money? Application examples will be considered in the article.

A measure of the success of an enterprise in the market is measured by the size and stability of the proceeds. Revenue growth almost always means a simultaneous increase in production volumes.

In order to determine at what stage of the project implementation its payback will be achieved, and to calculate how much needs to be done so as not to go broke, you need to know the break-even point formula in monetary terms.

Breakeven point. What does she give?

This is a financial indicator of the organization, reaching which, the company goes to zero. The ratio of a certain sales volume and the amount of expenses of the enterprise when its revenue becomes equal to costs.

The break-even point formula in monetary terms is needed to understand that it is impossible to produce less products, the enterprise will go bankrupt. If a business has yet to be organized, then such a calculation will help determine the feasibility of the entire event.

For example, if a preliminary break-even point is not reached, it hardly makes sense to invest in a deliberately losing project.

Calculation of the value of the critical indicator

Calculating the financial break-even indicator is not difficult. Understanding the calculation mechanism and the economic meaning of the indicator, you can determine at what level the business is and calculate its financial stability.

Visibility is the best way to understand how the breakeven point works. The calculation formula in monetary terms is given below.

So, how to operate with this concept (English break-evenpoint)? For the convenience of working with formulas, in the text below it will be denoted by the English abbreviation - BEP.

How to calculate the breakeven point? Formula:

BEP = Fixed costs ÷ (Revenue - Variable costs) × Revenue

Fixed costs

The fixed costs of production include expenses that do not directly affect the cost of production. Their value may remain unchanged over time.

Fixed costs can be conditionally divided into groups:

1. Lease - this may be the cost of renting a production room, warehouse, or renting machines and equipment. Costs will have to be borne even in the event of business downtime.
2. Depreciation - equipment for the production of products wears out over time, so the cost of restoring consumer properties of equipment is constant.
3. Taxes - include property tax, land tax, income tax, UTII and other contributions.
4. Salary of staff - this includes only employees with a fixed pay. If the manager’s salary is tied to the volume of services sold, then such costs will be considered variable.
5. The costs of utilities, maintaining a bank account and others - in a word, something without which the company cannot exist. One way or another, these expenses have to be borne both in bad days for business and in good ones.

Variable costs

These are costs directly related to the volume of services or goods produced. They affect the cost of production and increase simultaneously with sales.

Variable costs can be characterized by the following points:

1. Salaries of those employees whose material success is dependent on the products they sell. This was discussed above, comments are unnecessary.
2. Excise taxes and other taxes related to the volume of production.
3. Costs of products, materials or spare parts - that is, the costs of which the products will be made.
4. Payments for transportation of goods, air and rail transportation, interest for the provision of legal or brokerage services.

They are not included in a separate group, but when planning the increase in output, additional costs for wages (more employees will have to be hired), for electricity (when it was decided that the production process does not stop at night), and fuel ( when new territories are being developed where goods need to be delivered).

Necessary Assumptions

The calculation in question serves as a fulcrum for managerial decision-making. It should be borne in mind that the cost value inherent in the break-even point formula in monetary terms is approximate. Therefore, the final value will not be arithmetically accurate.

To make the calculations closer to the real conditions of the business, you need to take into account a number of nuances of using the break-even point calculation formula in monetary terms. An example will show at what minimum acceptable value of the shipped products the company will stay afloat.

Revenues and costs are related to the same time period. As a result, the breakeven calculation formula will show the state of the enterprise at the settlement date.

Distinctive feature of BEP

Among hundreds of financial values, only one - BEP - speaks of business success at a low value.

This is explained simply: the less goods need to be shipped or the services rendered in order to reach full payback, the more stable the enterprise.

Risk Analysis Using Break-Even Point

The break-even point formula in monetary terms will allow us to build a systematic approach to planning fixed and variable costs per unit of output, volume of production and cost of production.

By correctly combining these indicators, the following risky moments can be avoided.

• Oversaturation of the market with products. To produce a lot does not mean to sell a lot. To calculate the optimal volume of products and their prices break-even point formula will help (an example of the formula discussed above). Calculation of BEP will help assess the relationship between price and volume of production, show how the price will change with increasing volume and vice versa: how much should be produced when the price changes.
• Work at a loss - a decrease in revenue can be either a temporary difficulty or a harbinger of ruin. This indicator can be calculated not only for the entire enterprise, but also for individual projects or types of manufactured goods.

How often do you need to do the calculation?

In addition to all of the above, the break-even formula in monetary terms can be useful in making a balanced decision about the possible entry into new markets. After all, business expansion is an increase in variable and fixed costs that profits from the development of new territories may not cover.

If the breakeven level is normal, do not relax! It should be calculated regularly, because the market conditions are changing all the time, and you can miss the moment when urgent measures should be taken (to reduce costs, for example).

When sales are below breakeven

For those who need a more detailed analysis of the financial situation of their business, calculating the safety margin will help. This indicator will show how close to the crisis an apparently prosperous company can be.

The formula for expressing this indicator is as follows:

Safety margin = (Revenue - Break-even point) ÷ Revenue

In this case, the higher the value of the calculated value, the more stable the enterprise is in the market. Using a simple calculation, you can evaluate firms of various sizes that are at different stages of their development cycle.

Safety margin example

Suppose that the revenue of Company A is 2,500 rubles, and the break-even point is 2,000 rubles.

We will calculate the safety margin of "Company A":

Safety margin = (2500-2000) ÷ 2500 = 20%

The obtained value means that even in the case of a decrease in sales by 20%, the company will not be unprofitable.

You can verify the value obtained as follows: calculate the profit of the enterprise in the event that the volume of goods sold decreases by 20%.

Let us assume conditionally that for the considered “Company A” the variable costs amount to 1625 rubles, and the fixed costs - 700 rubles.

Profit = 2500 × (1-20%) - 1560 × (1-20%) - 800 = 0

The margin of safety is considered together with the breakeven point, since both indicators are important in the framework of a financial analysis of the organization’s activities.

Big difference

In the calculations, it is important not to confuse the breakeven point with the payback point. The latter means the moment when the profit margin from the sale of products has become equal to the funds invested in the business.

In addition, the calculation of the payback point of a business project is calculated using appropriate methods, and other financial indicators are included in the calculation formula.

New Horizons

"Company A" produces confectionery: cakes and pastries. Its break-even point (BEP) is 2,000 rubles, and the safety margin is 20%.

Having decided to win more customers, the company began to produce a third type of product - chocolates. Now BEP is 2500 rubles, and the safety margin is 25%.

In this example, the increase in the BEP value is logical: the enterprise is growing, its production costs are growing (a new workshop has been opened — higher rents, more staff — more costs for salaries). Increasing BEP means having to sell more in order to get more profit.

An example using the formula for calculating the breakeven point shows the interdependence between sales, unit price and total costs.

What else is important to consider

With an increase in output, the cost of its production will inevitably increase. There is a nuance here: if there are more products on the market, the price of them becomes lower.

Revenue is growing and profits are falling. Wholesale is always cheaper than retail. More products - lower price.

It is necessary to increase the number of manufactured products until their volume is greater than a decrease in profit per unit of manufactured products.

In the situation of access to new production facilities, care must be taken to ensure that the growth in production does not lead to a decrease in profit.

Knowledge of the method of calculating the breakeven point for any business and the ability to apply this methodology in practice will allow you to make timely and informed management decisions. To expand the assortment of goods or to develop a new region of presence, it is worth resolving issues of this order, having previously forecasted an increase in costs and possible fluctuations in profit from the sale of goods or the provision of services.