Learn about break-even point for your business to be profitable effectively

One of the most crucial concepts that any business must grasp is the "break even point". So, what exactly is the break-even point? Why is it so significant to a business's success? And how can businesses determine and leverage the break-even point to maximize profits? This article will delve deeper into these questions.

1. What is break-even point and its role

1.1 What is break-even point?

Break-even point is the level of revenue at which the business neither makes a profit nor makes a loss, meaning total revenue is exactly equal to total costs. In other words, this is the threshold that a business needs to overcome to start making a profit.

When analyzing breakeven point, There are usually two types break-even point attention:

1. Economic breakeven point (or breakeven before interest): This is the level at which sales revenue is equal to total production and operating costs. At this point, the business's profit before interest and taxes is zero, demonstrating its ability to cover production costs from revenue.
2. Financial break-even point (or break-even after interest): This is enough revenue to cover all expenses, including interest during the period. At this point, the business's pre-tax profit is zero, showing that revenue is enough to cover operating costs and interest costs.
   

1.2 The role of break-even point

Break-even point It is not just a number in a financial report but also has many important roles such as:

• Evaluate business performance: Break-even point is an important tool to help businesses determine the efficiency of resource use. A low break-even point shows that the business is operating efficiently and has the ability to increase profits quickly. On the contrary, if the break-even point is high, businesses need to find ways to optimize costs and improve operating efficiency.
• Make a business plan: In business planning, The break-even point is an essential factor that helps businesses determine the output needed to achieve the desired profit. It supports businesses in setting reasonable selling prices, investment orientation and other strategic decisions.

• Risk assessment: Break-even point provides an approach to assessing business risk by determining the minimum revenue required to avoid losses. It helps businesses analyze the risk level of investment projects and select projects with appropriate potential profits.
  

2. Formula for calculating break-even point in a business

Calculation formula break-even point basically:

Break-even point (BEP) = Total fixed costs/ (Unit selling price per product – Variable cost per product)

Or determined by the formula: BEP = FC / (S – VC)

Besides, break-even point It also helps determine the revenue needed to achieve balance between costs and profits. Breakeven revenue is calculated by taking output at break-even point Multiply by the selling price of the product. The specific formula to calculate break-even revenue is:

Break-even revenue = Break-even point x Unit selling price of each product

Breakeven Revenue = Fixed Costs / (1 - (Variable Costs / Revenue))

In there:

• Breakeven output: This is the number of products that need to be sold so that revenue is enough to cover all costs, including fixed costs, variable costs and interest costs (unit: product).
• Fixed costs: These are costs that do not depend on the level of sales output, such as rent, asset depreciation, management costs, etc. Loan interest is often considered a part of financial costs fixed (unit: dong).
• Unit selling price: Selling price of each product (unit: VND/product).
• Variable costs per unit of product: These are costs that vary with the quantity of products produced and consumed, including direct material costs, direct labor costs, etc. (unit: VND/product).

3. Illustrative example of how to calculate break-even point

To better understand how to determine break-even point, let's take a look at a practical illustration that helps businesses calculate to achieve a balance between costs and revenue. From there, businesses will make more accurate business decisions:

3.1 How to calculate break-even point for many products/services

A company produces and sells two products, product A and product B, with a total fixed cost of 100 million VND. The variable cost to produce each unit of product A is 50,000 VND, while the selling price is 100,000 VND. For product B, variable costs are 60,000 VND per unit and selling price is 120,000 VND. The percentage of revenue from products A and B is 30% and 70%, respectively.

We have:

Net profit for each product calculated by subtracting variable costs from the selling price:

• Net profit for product A: 100,000 VND - 50,000 VND = 50,000 VND
• Net profit for product B: 120,000 VND - 60,000 VND = 60,000 VND

Weight of net profit for each product are:

• Weight of net profit for product A: 50,000 VND x 30% = 15,000 VND
• Weight of net profit for product B: 60,000 VND x 70% = 42,000 VND

Break-even point for total output of two products is calculated as follows:

BEP = 100,000,000 / (15,000 + 42,000) = 1755 (products)

Therefore, to reach break-even point, businesses need to sell a total of about 1,755 products A and B. The specific quantity of each product type will be based on the expected sales rate (30% for product A and 70% for product B).

3.2 How to calculate break-even point when sales decrease/increase

Company A is operating in the field of electronic equipment manufacturing with fixed costs of 100 million VND. Each 1,000 products have a variable cost of 50 million VND, and the selling price of each product is 100,000 VND.

• Break-even point based on output:

Breakeven point by output: 100,000,000 / [100,000 – (50,000,000/1,000)] = 2,000 products

• Breakeven revenue:

Payback revenue will be: 2,000 x 100,000 = 200,000,000 VND

• Situation of selling 1,600 products: If only 1,600 products are sold, actual revenue will reach 160,000,000 VND, resulting in a loss of 40,000,000 VND. To overcome, the company needs to consider cutting fixed costs to achieve break-even point.

• Situation of selling 2,500 products: If sales pass break-even point With 2,500 products sold, the actual revenue will be 250,000,000 VND, creating a profit of 50,000,000 VND.

The above situations show the importance of achieving break-even point and the impact of sales volume on business profits.

4. Notes when analyzing break-even point

Here are the important factors that new stores need to pay attention to break-even point (BEP):

• Determine fixed and variable costs accurately: Fixed costs and variable costs play a key role in the calculation break-even point of the store. Therefore, store owners need to carefully classify and calculate these two types of costs to ensure the most accurate BEP results.
• BEP accuracy in multi-product business: Calculating BEP points for many products often depends on the actual selling price and revenue of each item. However, these factors can vary based on market and product volume, so BEP is not always absolutely accurate at all times.
• Avoid assuming production quantity equals sales quantity: Break-even point BEP is only a reference number to help stores determine expected output and selling price, and adjust flexibly later. In reality, stores need to maintain a certain amount of inventory to operate stably and avoid shortages.
• BEP fluctuates over time: BEP is a flexible index that can change when the market fluctuates due to inflation or changes in supply and demand.

The above points will help new stores operate more effectively when they clearly understand the meaning and usage break-even point.

5. Manage break-even point and budget effectively with Viindoo Accounting & Finance software

Viindoo Accounting provides a comprehensive and powerful solution for accounting management, helping businesses simplify their work and improve operational efficiency. This is an advanced budget management software, helping businesses optimize financial management through automatic data analysis and supporting budget planning, thereby being able to manage revenue and break-even points accurately.

Highlights of Viindoo Accounting software:

• Provide a comprehensive picture of financial accounting: Track and manage all aspects of financial accounting in detail and clearly with a smart interface, displaying full information such as ledgers, invoices, debts, and bank transactions.
• Automation features: Integrate automation features such as accounting, reconciliation and reporting, minimizing errors and saving time.
• Easily handle accounting tasks: Friendly interface, easy to use, supporting accountants in entering, checking and processing data quickly.
• Instant update reports: Access instant, accurate and detailed financial reports, helping leaders make quick decisions based on real data.

Hopefully this article by Viindoo has helped you understand the concept better break-even point and how to apply this content for effective business management. The capture and optimization break-even point is very important to ensure the business operates stably and profitably.