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Break-Even Point: What is it? How to calculate and use it?
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In order to manage your business the right way, you need to know how to calculate your break even point. At Trezy, we love to provide simple and straightforward tips to help you lead a more successful company, so let’s take a look at it through some different angles!
What is the break-even point?
The break-even point is the point at which a business's revenues are equal to its costs.The break-even point identifies how much revenue you need to bring in to exactly cover your costs. Reaching the break-even point means your business has neither lost nor made money.
As a business owner, your goal is to obviously be above this point, in order to make a profit! If you are below the break-even point, your business is not profitable, and is losing money.
"Below this point you have to break your piggy bank to cope with the financial loss, once you are above it you make money and you can fly to the Bahamas so it is pretty wide!" - Thierry Veil, co-founder of Bagelstein
Why is the break-even point important?
It’s important for business owners to analyse their break-even point for several reasons. Break-even analysis enables business owners to identify their margin of safety ad is a critical tool for effective planning and decision making. Specifically, break-even analysis allows business owners to:
- Know how many goods/services need to be sold in a given period
- Know the impact of pricing adjustments to existing products
- Analyze at what point new goods/services will become profitable
If for instance you run a pizzeria, your revenues will be the amount of money you generate from selling your pizzas. Your costs will be the amount of money you spend to run your business. And there's a lot, every entrepreneur is ware of this! Employees’ wages, raw materials, rent, purchases of equipment, bills, etc…
So in order to be profitable, you'll want to reach the break even point as soon as possible, in any given period. This rule applies to all types of business! If your company is already successful, you can use break-even point to improve efficiency. If your business is only starting, break-even analysis will allow you to anticipate when you will start earning money from your work! Now, let's see how to calculate it!
"A mistake you shouldn’t make is checking it daily, because it can get very stressful if you don’t reach it and is also hard to analyse this way."- Thierry Veil, co-founder of Bagelstein
How do you calculate the break-even point?
We will first keep it simple, and then get more specific! You simply need the total costs to match the total revenues to get your break-even point.
TOTAL COST = TOTAL REVENUES
The total costs of a company are the sum of the fixed costs such as rent, wages, insurance, loans, investments. And the variable costs like raw material, taxes, commissions, operational expenses.
FIXED COSTS + VARIABLE COSTS = TOTAL COST
The total revenues is the price of your products or services multiplied by the quantity sold.
PRICE OF PRODUCTS X NUMBER OF PRODUCTS SOLD = TOTAL REVENUES
The two ways to calculate the break-even point:
Either in units, or in currency.
Calculate the break-even point in units
It identifies the number of products you have to sell in order to break-even.
BREAK-EVEN POINT (units) = FIXED COSTS ÷ (SALES PRICE PER UNIT– VARIABLE COST PER UNIT)
If your fixed costs are €1000 per month, and you sell €1 items with a variable cost of €0.25 you calculate as such :
€1000 ÷ (€1 - €0.25) = €1333.3 OR €1000 ÷ €0.75 = €1333.3
In order to reach the break-even point this month, you will have to sell over 1333 items.
Calculate the break-even point in currency
It identifies the amount of revenue you have to bring in to reach the break-even point. Following the same example where your fixed costs are €1000 per month, and you sell 1€ items with a variable cost of €0.25. To calculate do as such :
FIXED COSTS ÷ CONTRIBUTION MARGIN
€1000 ÷ €0.75 = €1333.33
To break-even you will need to sell at least €1333.33 euros worth of items.
What to consider when calculating the break-even point?
When calculating the break-even point several things must be taken into account, as some of the numbers you will put in your equation will be estimations! You will have to make several scenarios and apply margins to what you calculate.
Concerning your costs, some unexpected events might occur like an increase in the price of raw materials, or the cost of new appliances/machinery!
Regarding revenue, your estimated turnover might be different than what you expected, and taxes might influence the actual figures. Don't forget that the more you sell, the higher your costs will be!
"The biggest unknown to the equation is the amount of revenue! When your revenue equals your costs, you’ve reached break even point, it is as simple as that!" - Thierry Veil, co-founder of Bagelstein
You can of course use the data from previous years to help you make an estimate, but keep in mind that it's not a guarantee! Try to pinpoint how your revenues and costs evolved over the years.
Banks and investors are very interested in the break-even point if you are asking for a loan or for credit, it will also provide insights into your cash flow !
Expert Interview with Thierry Veil, co-founder of Bagelstein
What would you say to a young entrepreneur about break-even point?
I often talk about this with my network and it is ! Below this point you have to break your piggy bank to cope with the financial loss, once you are above it you make money and you can fly to the Bahamas, so it is pretty wide! In our industry and according to calculations like the average amount spent. I often prefer to materialise it in the number of people coming through the door rather than an amount of money. It is easier to visualise and to have a simple metric if you are not a seasoned business owner. Accountants love their intricate terms, scoring big at Scrabble to explain rather straightforward concepts.
What about more mature companies?
As a more mature company, you will be likely to know your fixed costs such as wages, rent, bills etc! Also, when you've had a business for a while you'll understand what you don’t need like hiring or investing! Even if you can see some changes in raw material prices, your variable costs depend mainly on how much you will sell because of taxes! So the biggest unknown to the equation is the amount of revenue you will make! When your revenue equals your costs, you’ve reached the break even point, it is as simple as that!
What’s a good way to use break-even point?
A mistake you shouldn’t make is checking it daily, because it can get very stressful if you don’t reach it. It's also hard to analyse this way. I recommend checking it monthly, while other metrics are to be monitored more often! It's an indicator that shouldn’t be a daily tool to manage your business. It should be like a lighthouse in the distance of your finance management rather than a compass you’ll look at all the time.
Revenues, costs, and your break-even point: The best insights are always in Trezy!
The best way to keep track of your business’ finances is to have an automated and clear overview in real time - to get the answers you need without browsing through spreadsheets!
Trezy is the all-in-one app for your business’ financial management. You can monitor your costs, revenue and calculate your break-even point!
Making your life easier, and allowing you to focus on making great business decisions.