How to calculate the breakeven point is a fundamental question for any business owner large or small. This important indicator makes it possible to establish, based on the number of units sold, whether the business will generate profits or losses. Knowing the equilibrium point of the company is something very useful, since it leaves you well placed before the expenses and profits of the company.
However, we must know that this point should not be the goal line for the company , in fact what is sought is to quickly get out of the breaking point, this is because what is sought is profits not to be in balance.The balance point should be considered as the starting point , since once what is spent is earned, later much more should be earned than what is spent in the company, the balance point helps to evaluate the budget of the company company .It must be remembered that at this point there will be no remaining profits, we must also bear in mind that costs will increase, due to the constant demand for products .
How To Calculate Break Even Point
Calculating the equilibrium point is a very simple task, we must take into account some aspects before performing this important calculation:
Fixed costs
They are the costs whose value never changes , they stay the same every month. Rentals could be considered a fixed cost.
Variable costs
They are the costs that can change according to your billing . It goes together with the volume of sales, since if the variable cost increases this too. People’s basic purchases could be considered a variable cost.
Total costs
It is the total of fixed costs and variable costs . A car purchase could be considered a total cost. The formula must be made: Total costs = Total profits.
Unit variable cost
It is where variable costs are calculated between the number of units sold. The following formula must be carried out: Unit variable cost = Variable cost / Units sold.To obtain the equilibrium point, the following formula is used: PEU = Fixed costs / Sales price – Unit variable cost.
Importance of the breakeven point
The equilibrium point must be an essential tool to raise company situations , likewise it must be present when updating the company’s strategies. That is, the breakeven point is the one that will tell whether or not there is a profit on an investment. It must be the objective and goal of a company , but then it must be exceeded, it must not remain at that point.
As previously stated, the first objective of companies is to reach the equilibrium point, at this point the company’s calculations must be constantly reviewed, so we can know if we left that point and, we will know if the change was positive or negative.
It is the most basic way of knowing if a company meets all its expenses and investments , with the current price of the product that is manufactured. When we start with the creation of the company we must take the balance point into account.
In this way, thanks to this calculation, we can make forecasts, strategies and predictions about the economic accounting part of the company, we can know precisely the most accurate price for the product and the degree of realism.
It allows to check if the business that is being done is viable or not, if there is income and expenses in the financial part of the company. If the equilibrium point is no longer so, it is easy to bring it back to full equilibrium through calculations. All this and more allows you to determine the balance point.
In short, the breakeven point helps entrepreneurs to determine the price of products, as well as helping them to know when they will start to make a profit on their investments.
My company has already reached breakeven, and now?
Once the breakeven point is reached, you start to win, however, you must bear in mind that not everything that comes in is profit.You have to remember that the variable cost increases, therefore, you must always keep this in mind so as not to have a wrong idea of the value of your profit.A good recommendation is to calculate a new breakeven point each time your numbers have a reasonable variation.
