To effectively manage your business, it is essential to pay attention to certain indicators. For example, profit margin, ROI (return on investment), CAC (customer acquisition cost) and financial break-even point (BEP).
This is because these KPIs (key performance indicators) allow you to analyze different aspects of a company. For example, whether the results are as expected, whether there are profits or losses, whether adjustments need to be made to processes and operations, whether there are bottlenecks, and much more.
What is financial breakeven?
Every entrepreneur wants their company to grow and generate profits over time. However, in addition to thinking about this development, it is necessary to have adequate monthly expense control to be able to cover all the basic costs for the operation of the business.
The financial break-even threshold becomes important at this time. This concept concerns the equity between an organization’s revenues and expenses. In other words, the indicator shows how much a company needs to sell to cover its total costs.
This way, it is possible to analyze whether the business is financially balanced. In other words, you can check whether it is able to honor its commitments and obligations or not.
When a company’s performance is above the break-even point, it means it is generating profit. When results are below this point, it means it is operating at a loss. In this case, it is necessary to act quickly to propose changes and improvements.
What is this indicator for?
The PEF allows entrepreneurs to understand what minimum revenue their businesses need to have to cover their expenses in order to have positive income.
Through this analysis, you will know more precisely how many products or services need to be sold to cover all of the company’s costs and expenses .
After all, every company has several fixed and variable expenses that need to be covered to maintain operations. Consequently, the financial organization of the business will be compromised — and there is a risk of the business going bankrupt.
Importance of financial break-even point
As you have seen, the break-even point is related to a company’s financial health. Therefore, this is a very relevant indicator for analyzing whether your business is generating profit, loss or if it is earning just enough to sustain itself.
Based on the results obtained, it is possible to observe how the company is performing in financial terms. If the business is facing problems, it is essential to carry out a careful financial analysis, in addition to making adjustments and optimizations to reverse this scenario.
It is worth analyzing, for example, whether it is not possible to adopt practices such as:
- save resources;
- change the pricing strategy;
- change the sales approach;
- among other aspects.
If the business’s financial situation is not favorable, it is essential to develop actions and measures to prevent it from getting worse.
How can you figure out the financial break-even threshold for your business?
Now that you are aware of the financial break-even point, its purpose, and its significance, it is time to understand how to recognize it in your company.
For this, the following formula has to be used:
PEF is calculated by dividing the contribution margin by the difference between fixed and non-disbursable costs.
The contribution margin can be obtained through this calculation:
Sales value (revenue) less variable costs and expenses equals the contribution margin.
It is worth noting that, in this calculation, the depreciation of the company’s assets and expenses that do not require disbursements — such as the devaluation of investments — should not be considered.
Practical example
Imagine that your company is producing a certain product with a sales price of R$12.00 per unit. Fixed costs are R$15,000.00 per year and non-cash expenses are equivalent to R$3,500.00.
Before inserting each of the above data into the financial break-even formula, it is necessary to calculate the contribution margin. In this case, suppose that the variable costs and expenses of the product result in R$ 10.00. It looks like this:
Contribution margin = R$12.00 – R$10.00
Contribution margin = R$ 2.00
PEF = (R$ 15,000 – R$ 3,500)/R$ 2.00
PEF = R$ 11,500/R$ 2.00
PEF = 5,750
This result (5,750) represents the financial break-even point in terms of quantity of products.
To find out the PEF in financial terms, simply multiply 5,750 by the product’s sales price, in this case, R$12.00. Therefore:
PEF = 5,750 x R$ 12.00
PEF = R$ 69,000.00
In other words, the amount corresponding to the financial break-even point is R$69,000.00. So, in this example, your company would need to sell 5,750 units of the product per year to earn R$69,000 and thus reach the PEF.
With this information, you have a clear idea of ​​how much you need to earn to maintain your business. Everything sold above this amount will make up the business’s profit.
Conclusion
Throughout this post, you learned what the financial break-even point is and how to calculate it. Now, it’s worth putting what you’ve learned into practice to maintain the financial health of your business and, if necessary, make decisions to reach and exceed the break-even point.
