Starting to undertake? One of the biggest concerns of digital entrepreneurs is how much they should produce in order not to have losses, or to start making profits.
How many units of products must I sell to cover production and operating costs? Exactly how much should he sell per month to survive? You are probably already asking yourself these questions!
Fortunately, entrepreneurs have with which they can have absolutely everything under control, including the amount of money they must produce to keep their business afloat. We know this formula as the break-even point or neutral point, and it basically refers to that moment in which your business reaches minimum sales where there are no profits but there are no losses either.
That said, to be profitable in business, it is important to know what your break-even point is and in this post we will teach you everything you need to know to calculate the break-even point of your business and thus keep the growth and future of your business under control. control.
Prepared? So… Let’s get to it!
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What is the break-even point of a business?
The breakeven point of a business, or also known as the breakeven point, is that state in which the income covers the fixed and variable expenses. Basically, this means that the business sells just what it needs. At this point, the entrepreneur neither wins nor loses.
Knowing when a business reaches its breakeven point is important to be clear about how interesting or profitable the idea is, financially speaking, as well as helping to be aware of contingencies or financial problems that may arise along the way. In fact, calculating the breakeven point is a metric that can be projected even before starting a business, in this way the entrepreneur can discover how long it will take to obtain benefits.
What is the balance point for?
A business can be making a lot of money, but still make a loss. Incredible, right? And this is one of the main reasons why many startups fail.
Knowing the break-even point is useful for deciding prices, setting sales budgets, and preparing a business plan. The break-even calculation is a useful tool for analyzing your business’s critical profit drivers, including sales volume, average production costs, and average selling price.
By understanding where the break-even point of your business is, it is possible to:
1. Know how much is the minimum you should sell
Break-even analysis will help you determine exactly how many sales, or how many products, you need to sell to generate enough income to pay expenses. Know how many units must be sold to avoid incurring losses during a given period of time.
2. Plan your profit levels
Breakeven analysis also allows you to know how much profit you can make with different sales volumes. Any sales volume or number of units sold that exceeds the break-even point will result in a profit.
3. Set the best price for your product or service
The price of the product is one of the main factors that as an entrepreneur you should review when starting. The price of the product can make the difference between failure and success, hence its high importance!
Establishing different price levels and evaluating the equilibrium analysis at each level will help to know the level of profitability it provides and also to study the effect of each level in relation to other important factors such as consumer affordability, competition, etc.
Eager to start doing calculations? Having this information in your sights before undertaking can also help you know how profitable the product you offer is, some ideas, no matter how creative and innovative they are, are simply not profitable.
Other information that this metric can give you is how the reduction in price or sales volume could affect your profits or what increase in price you will need to compensate for an increase in fixed costs.
Formulas to calculate the break-even point
Now that we are clear about what the break-even point is and the importance of this calculation for any undertaking, it is time to start adding, subtracting and dividing.
At first, calculating the break-even point is a simple task. But first you will need to know what your fixed and variable expenses are to get the total costs. Let’s look at these concepts in more detail.
1. Total Revenue (IT)
The total income for an entrepreneur is the amount of money he receives from consumers, thus constituting the total of what a company or business receives.
The formula to calculate this data is:
Total revenue = unit price x number of units sold
2. Unit sale price (Pvu)
For its part, the selling price per unit (PVU) is the average price at which a unit is sold.
3. Unit contribution margin (Mcu)
Another concept related to the previous one and it is very important is the per unit or unit contribution margin, which we can arrive at by subtracting the sales price per unit and variable costs per unit..
Unit Contribution Margin = Price – Unit Variable Cost
4. Fixed costs (FC)
Fixed costs are those expenses that do not change from month to month. That is, those payments that you must make every month, regardless of the value of the billing. A fixed cost could be the rent of a commercial space, an insurance policy, contracted advertising, contracted cleaning and security services, etc. Regardless of the sales volume, its value will always be the same.
5. Variable costs (CV)
Variable costs are those expenses that vary according to the value of the billing. This means that if for example one month you sell more, this value will increase.
An example of a variable cost could be the raw materials we use to create the product, direct labor, etc.
6. Total costs (TC)
Total costs are basically the sum of fixed and variable costs. When you are clear about the total costs of your venture, you can easily deduce that the break-even point is when sales or income are equal to these costs, you neither lose nor win!
Total Costs = Fixed Costs + Variable Costs
7. Unit variable cost (Cvu)
This value is calculated by dividing the variable costs, which we saw earlier, by the number of units sold in a given period.
The formula would be the following:
Unit Variable Cost = Variable Cost / Units Sold
How to find the balance point in my business?
Now you may be wondering, how can I find the break-even point in my business and what to do with this data?
In addition to putting these calculations into practice, it is important to analyze the result obtained. Study the variables such as the price, the costs, compare the data obtained with the results that you had been obtaining previously and put it all in a graphic representation.
This may be the starting point of your venture or it may become a reference for your next plan, it is important to make an interpretation of the break-even point and constantly compare it, make decisions based on this data, look for ways to minimize costs or to sell more so as not to fall into stagnation, etc.
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Examples of how to find the balance point
If you are just starting out in your own business, you are probably already aware that profits come once you focus on providing superior quality in your products or services to meet the needs of your target audience. Then, you must define the contribution margin to know your operating expenses and also the profitability of your business idea.
Suppose you are starting your business and you are offering a .
To calculate the break-even point in your business you must do the following calculation:
If your product is sold at €50 per unit and the company’s fixed costs are €3,000 with variable costs of €20 per unit, the calculation can be made as shown below:
3000 / (50 – 20) = 100
This means that you will need to sell 100 units to cover your costs and break even.
And how to do when several products are offered?
If your business has several products for sale, it is necessary to calculate the break-even point for each product separately, taking into account the of each product individually.
Volume balance point
To determine the break-even point in sales volume you must do the following calculation:
Break-even point = fixed costs / (1-variable costs / total sales)
Using this formula, it is possible to determine how many units of your product you need to sell to break even. Once the business has reached this point, in sales or units sold, all costs are assumed to have been recovered.
From this moment on, each additional unit sold will result in a profit for your business. This increase in profit will be by the amount of unit contribution margin, which is the amount of additional revenue that goes to cover fixed costs and profit.
Break-even point in value
The mathematical formula to calculate the balance point of your business in value is:
Break-even point = fixed costs / total sales – variable costs
In case you want to know your balance point in monetary values and not in physical quantities, you can use this previous formula. It is recommended to use this equation when the activity is not easily recognizable in physical units, or when there are several products.
But even when there are several products, to the extent that fixed and variable costs can be separated and allocated to the different products, the break-even point can be calculated by product and thus have a more dynamic management tool.
What to do after finding the balance point?
Once the point of balance in your enterprise has been found, it is when we can say that your business is already a source of profitable income; however, you must bear in mind that not everything that is entered is profit.
You have to take into account that the variable cost increases, therefore, you must keep this in mind so as not to have a wrong idea of the value of your profit.
One recommendation is to perform the calculation every time your numbers have a significant variation.
In addition, it is also convenient that a percentage of these “earnings” be allocated to a savings fund for the business itself, which can be used to cover, for example, unforeseen expenses that may affect the profitability or operability of the business.
If the number of units you need to sell is more than you can realistically achieve, then…
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