A company’s breakeven point is the turnover that a company must release to be in financial equilibrium. That is, not to generate losses or profits. Beyond this threshold, it’s a good sign, below this value, is that the company is not profitable. It isn’t easy to dissociate it from the breakeven point since the two notions are related.
The dead is when a company is in equilibrium: it does not realize profits or losses. Generally, it is useful to express it over some time to know WHEN this situation will happen.
“It’s all well and good, but why would I bother to calculate these things?”
A legitimate question to which we will endeavor to answer the best.
- If you are in the creative phase or a young start-up, these indicators can be used to determine the level of activity you will have to achieve to start reaping the fruits of your hard work.
- If you are at the head of an “older” company, its calculation will allow you to highlight the objectives to be achieved and create a guideline for the year to come.
- Banks particularly appreciate the breakeven point and the breakeven point of your company when you apply. These are indeed quite concrete elements that can tip the balance in your favor if they are well documented.
Calculate a company’s breakeven point
There are several ways to calculate a company’s breakeven point, but in this article, we will only cover the simplest of all for the sake of clarity. Be aware, however, that one of the other ways is the variable cost margin formula. It is very precise, however more complex to apprehend, and requires several calculations to be representative.
The simplest formula is:
SR = CA – (CV + CF)
SR = Break-even point
CA = Turnover (You can help your business plan if you want to calculate a breakeven point)
CV = Variable expenses (Purchase of raw materials or supplies, transport costs…)
CF = Fixed charges (Taxes, rent, taxes)
If your turnover is higher than your expenses, it means that your company is making a profit.
If it is equal to your expenses, it is because the company has reached its breakeven point.
However, it will give you the remaining amount to cash to reach the balance if it is below.
But the formulas are not very digestible generally. We have therefore prepared a practical case that should allow you to understand the process better.
Example of the calculation of the breakeven point:
Mr. Dupond runs a restaurant. Its estimated turnover is $150,000.
Its fixed costs are $170,000
The variable charges of $105,000
It therefore remains for him to make the following calculation:
150,000 – (170,000 + 105,000) = – 125,000
Mr. Dupond will therefore have to earn $125,000 in additional revenue if he wants his business to break even.
Calculate a company’s breakeven
First of all, it must be remembered that calculating the breakeven point (in the form of duration) results from the breakeven result. You must therefore determine the latter before addressing the next part.
Formula to calculate the dead point (duration):
PM = SR / (CA / 360)
PM = Neutral
SR = Break-even point
CA = Turnover (annual)
Let’s continue with the scenario of Mr. Dupond’s restaurant. Now that he has calculated his breakeven point, he will proceed as follows.
Example:
125,000 / (150,000 / 360) = 300
It will take Mr. Dupond 300 days to bring his business to breakeven.
Limits to consider
If the breakeven calculation is something important, some disadvantages to this calculation method may tarnish the picture. Be aware of this and do not rely on this indicator, especially when it comes to the projected breakeven point.
Already, it can be difficult to determine the charges, those variables in particular: unexpected purchases cannot be anticipated in some cases, which can sometimes distort your calculation.
And it’s the same with your projected revenue: as its name suggests, you rely on estimates of events that have not yet occurred. So be careful about the results you are going to get: they are sometimes subject to change.
Several points can help you avoid such disappointments:
- First, considering that if you project an increase in your turnover, this implies an increase of the charges by definition.
- Speaking of charges, variable ones have a degree of uncertainty, and it cannot be easy to anticipate them. Be pragmatic and apply a small margin to what you have calculated. You are never immune to an unforeseen.
- Foreseeing the future with the help of the past is also a relevant option. If you have doubts about your turnover or your projected expenses, take back your data from previous years (if you have any). For example, was your growth about 2% per year on the latest results? So, if you get 10% in your calculation, there may be a problem.
Conclusion
Break-even and breakeven calculations are, therefore, very important elements to bear in mind. The results will allow you to better visualize the state of health of your company and feed your thinking if you have to make important decisions.
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