The Break Even Point, also known as the break-even point or by the acronym BEP, is a concept as simple as it is central to business: it is no accident that it is considered one of the most effective methods of reduce entrepreneurial risk!
But what is BEP? And why does performing break-even analysis contribute to company sustainability and growth?
Continue reading the article to find out.
Break Even Point, what is it and what is it for?
Do revenues exactly cover costs, and does the company make no loss and no profit? That is precisely when the Break Even Point occurs.
At this point, business activity neutralizes, reaches perfect equilibrium, and the entrepreneur has no profit, but neither does he or she incur a loss.
This definition may leave one to believe that a company's break-even point is nothing more than a more theoretical and random concept. Instead, the Break Even Point plays an essential role in any decision the entrepreneur plans to make while protecting the soundness of his or her company.
Calculating the Break Even Point is important because it allows the entrepreneur to understand the point at which his or her business becomes for all intents and purposes sustainable and begins to generate profits.
But let's look in detail at the top moments in business life when BEP calculation can be useful to you:
- Planning: identifying the break-even point allows the entrepreneur to plan actions to achieve financial balance and growth of their business. A practical example: BEP in hand, you can determine the number of units you need to sell to cover fixed costs and start generating profits.
- Anticipating revenue: The Break Even Point will anticipate how much revenue is needed to cover costs to start making a profit. This will enable you, for example, to set sales targets.
- Making strategic decisions.: increasing or decreasing prices, diversifying products or reducing costs. Whatever choice you are about to make, knowing the BEP will enable you to adapt your business to market conditions and customer needs.
- Optimize: BEP helps you identify areas of your business where costs are too high relative to revenue, and then to find effective ways to reduce them. This will help make your business more efficient and profitable.
- Monitoring performance: By calculating the break-even point on a regular basis, entrepreneurs can monitor the performance of their business over time and see if they are achieving their goals.
How is the BEP calculated?
To calculate the Break Even Point you can use an arithmetic formula. Alternatively, if you prefer to have a graphical representation of your break-even point, you can make use of a Cartesian plane.
Calculating BEP with the arithmetic formula.
As we have already had occasion to say, the Break Even Point is the amount of units that you need to produce to cover your costs. In order to determine it, therefore, it is essential to know the company's fixed costs - CF, the selling price of a single unit of product - PV, and the unit variable costs - CVU, so called because they refer to each individual unit produced.
In summary, the Break Even Point is obtained by making the ratio between fixed costs and the result of subtracting the selling price from the variable unit cost, also known as the contribution margin.
BEP = CF / (PV - CVU)
Calculating BEP with a Cartesian graph
Instead, to calculate the Break Even Point graphically, one must represent on a Cartesian plane the fixed costs and revenues on the y-axis (Y) and the quantities produced and sold on the x-axis (X).
I fixed costs do not depend on the production considered, so they are represented by a straight line parallel to the X-axis, while that of total revenues starts from the point O, or origin, of years and grows proportionally as the two variables change.
The point at which total revenues meet total costs is the BEP, l'perfect balance of production, at which the firm makes no losses and no profits.
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