The business you do is all about the money that comes in at the end of the day. Sometimes you may get more money than the invested amount, which is profits, and sometimes, you may not profit, which is losses. Periodically you may end up in a situation where you do not gain profits or losses in the invested amount, and such cases are known as the break-even point.
The break-even point is a term in accounting used to represent the situation when a business's revenues and expenses match each other within a specific period. When people say that the company is at the break-even point, it states the business has no net profits or losses - the expenses and profits broke evenly.
For example, let us say you invested 1,00,000 INR into your business. At the end of the financial year, your profits were 1,00,000 INR. And this situation, where your investment and the amount you got from investing match each other, is called the break-even point.
Break-even analysis comes with a bunch of features. Analyzing the break-even point helps you determine when the invested money and profits match each other before the product or service is off for sale. Some of the benefits of break analysis are:
1. Find missing expenses
2. Limit the emotion-based decisions
3. Set proper goals
4. Secure funds
5. Maintain an appropriate pricing strategy
Even the stock market break-even points follow the same strategy followed in the business. For instance, if you invest 1000 INR in any stock and if that price goes up, it is profit. If it goes below the invested money, it is a loss. But if it remains the same, it is neither getting any profit nor experiencing any loss, so the stock is at a break-even point.
Similarly, break-even points are followed in the call option break-even point and put option break-even point. However, they differ from the actual break strategy.
There are two ways to calculate the break-even point. One is based on units, while the other focuses on dollars.
To calculate the break-even point in units, you should divide the fixed costs by the gross profit margin. Units break-even is also known as the accounting break-even.
Break-even point in business (in units)= fixed costs/(revenue per unit-cost per unit - variable price per unit)
Use the below formula to calculate the break-even point in dollars. Dollars break-even is also known as the financial break-even.
Break-even Point (in dollars) = fixed costs/(sales price per unit x BEP in units)
1. The independent of the sales volume prices, such as rent, come under the fixed costs.
2. The costs that depend on the sales volume, such as the materials needed for manufacturing or production, come under variable prices.
A company needs to calculate the break-even point or BEP to understand the minimum expenses a business needs to cover the production expenses. However, the BEP may increase or decrease depending on several factors. Some of them are:
It states that there is a higher demand when customer sales increases. Then the firm should start to produce more products to meet the new orders. Therefore it increases the break-even point.
The hardest part of running any business is when the sales remain on the same line while the production and other maintenance expenses increases, such as raw materials, rent, and others. These situations also increase BEP on the expense side.
Equipment failure results in not maintaining the targeted units within the mandated period. Therefore, it leads to higher operational costs, and the BEP rises.
The business should reduce BEP as much as possible to gain profits. Some steps to incorporate into your business strategy to reduce the break-even costs are:
1. Increase the products price:
One thing that is easier to say and harder to implement in a business is increasing the product's price. The fear of losing customers restricts many business owners from raising prices. However, if people love your product and if your products are of good quality and solve the most complained problem by people, you can increase the price, and people pay for it.
2. Outsource the production:
Outsourcing the work can be the best idea, especially when there is a demand for the product. It helps in reducing manufacturing costs.