What is the financial breakeven point?
The financial breakeven point is a percentage index that marks the point at which sales generate income that is equal to the expenses and costs of an operation . From the breakeven point, the company begins to make a profit. Beneath it, you are trading at a loss.
It is also known by its English name Break Even Point (BEP) and must indicate the minimum income for the company to cover its expenses, beginning to have positive profits.
The balance point calculation allows the entrepreneur to know the minimum monthly or annual income to cover fixed and variable expenses. It is generally estimated in the planning stage of a new project and helps predict the viability and sustainability of the business. The lower the breakeven point, the greater the safety of the operation.
Financial equilibrium formula
The financial break-even point is calculated using the formula:
Formula PEF = Fixed and Out-of-Pocket Costs / Income – Variable Costs and Expenses
To calculate the financial breakeven point, it is necessary to consider the fixed costs generated by the outlays by the company, that is, those that include money outflows. There are other expenses that are not considered, since they are only accounted for and do not cause financial flows (in cash), such as asset depreciation expenses.
Other data for the formula are the income obtained from the sales and that generate the company’s income, as well as variable costs and expenses. As an example, the cost of having bought the products for resale, or in the case of industries, the costs of raw materials and the expenses of their sales.
Income is subtracted from variable costs and expenses, resulting in the so-called contribution margin or gross profit. You can learn more about the contribution margin.
The breakeven point helps the entrepreneur understand the dynamics of the company, in addition to helping to build sales goals. By determining the break-even point in the unit distribution margin, it is possible to predict the exact number of products that will be sold to reduce costs to zero until a profit is made.