Break-even point

If at the beginning of your business you calculated well the working capital you need to cover operational activities, you should have at least a grace period of 6 months to a year. Generally in the course of your first year you should have reached the break-even point. This is the point where there is no profit, but no loss either. From there you will be able to generate profits.

We would like our business to not only be profitable, but we would like our profit to grow month after month and year after year. A margin between 10% and 20% is considered a good number. However, this is not realistic, especially in the first few years. The important thing is to have a good business plan, to anticipate problems as much as possible and to adapt quickly to whatever comes our way.

One of the ways to stay alert to the risks of insolvency and to project the growth of the business is to be clear about our contribution margin and the break-even point.

What is the break-even point?

The break-even point is an indicator that allows you to know the point or moment when your sales revenue equals your fixed and variable expenses in a given period. It is that intersection where there is no profit or loss.

You can know the amount of sales you must ensure to recover the investment and the price at which you must sell to reach the break-even point, or exceed it and generate profits. It can be used for both products and services.

What is the break-even point for?

Our fixed costs arrive every month regardless of whether we have made many or few sales. We have to keep paying utilities and services, rent, salary, insurance, and so on. It is important to know how much money we will need to survive the month, and how much we can make from that to make a profit.

Knowing the break-even point allows us to:

• Avoid economic uncertainty.

• Plan, optimize and manage more efficiently your expenses, both fixed and variable.

• Know in real time if you have losses or profits.

• Plan the amount of sales we will need to cover costs and if we have enough products/services to meet the goal.

• Know precisely when you will start generating profits.

• Adjust if necessary the selling price.

• Re-evaluate your objectives if the break-even point is unattainable.

• Confirm the economic viability of your products/services.

• Develop contingency strategies in case of a sudden decrease in sales.

• Visualize the evolution of your business by comparing different periods.

How to calculate the break-even point?

Determining the break-even point is not difficult. There are several formulas but the most popular one takes into account the fixed costs, the variable cost per unit and the selling price per unit. These variables are used to complete the formula and obtain the break-even point, where you neither win nor lose. From that result you will begin to receive profits.

Qe= Cf / (Puc-Cuv):

• Where: Qe is the break-even point.
• Cf: are the fixed costs that are necessary for the operation of the business, which are maintained every month and do not change with sales.
• Puv: the price of the product/service per unit.
• Cuv: variable cost per unit, they are those that vary according to sales, they depend on these. The higher the sales, the higher the cost.

To know how much would be in revenue you would only have to multiply that amount (result of the break-even point) by the price per unit. If you want to know the profit you generated by selling a certain amount of product/service, the formula is as follows:

• Profit = Selling price - Total variable cost - Total fixed cost.

Contribution margin: refers to the difference between the selling price and your production cost.

For services, it is the same procedure as for products, but with emphasis on the billable hours, which are the ones that allow us to obtain the contribution margin.

If you have several products or services you must make calculations for each of the products or services.

This calculation can also be represented graphically, showing the intersection where costs and revenue intersect. If you use Excel or some other accounting program you can generate the graph automatically once all the data series and formulas are included.

4 Break-even point result

The break-even point is not an end, it is a means to objectively value products and services and their cost/benefit. How much do we need to produce? At what price? What process or resource can I optimize? This is something we need to do frequently throughout the year. Especially if we are changing costs and expenses.

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