Break-even formula
Posted: Sun Dec 15, 2024 10:34 am
One of the most important keys to having a profitable business is knowing when you will be able to generate revenue consistently. To do this, there is a metric known as the break-even point .
This value tells us at what point the company stops losing money - either because of the volume of its sales or because its prices are high enough to make a profit. The break-even point is also known as the break-even point.
In this article we will learn in detail the profitability threshold, how to calculate it, and several ways to reach it in the shortest time possible.
What is the break-even point?
A company reaches the break-even point when sales revenue exceeds costs.
In other words, the break-even point is when the company stops making losses and becomes a profitable business. There are two main ways to calculate this value:
Break-even point by sales volume : This is mainly used to determine the amount of income you need to generate. For example, €10,000 per month.
Break-even point per unit price: This lets you know the quantity of products you need to sell to be profitable. For example, 100 units per month.
With this in mind, let's look at the break-even point formula and how to calculate it in both cases.
To understand the break-even point formula in a simple way, we are going to use a simple and practical example.
A practical example: a shoe factory
Imagine that a businessman has a small russian whatsapp number street-level business that makes shoes. In this business, there are several income and expenses to take into account:
Monthly fixed costs ( FIXED COST ): are the expenses that the business has every month, regardless of the amount of sales. An example of this is the rent of the premises, the telephone line, or the electricity bill.
Your variable costs ( VARIABLE COST ): Variable costs are those that depend on the volume of business. For example, the materials to produce a shoe or the shipping costs of the product.
The unit sales price ( PRICE ): is the value for which the product is sold, in this case a shoe.
Profit margin ( MARGIN ): The profit margin is the money left over once a shoe is sold and variable costs are subtracted from the sales price.
The numbers
Let's assume that in our example the values are the following, in order to then calculate the profitability threshold:
With these numbers in hand, let's calculate the break-even point in sales volume and unit sales.
Achieving profitability in sales
As we have said before, the break-even point in sales volume is the amount of revenue that must be generated to cover expenses. The formula to calculate this value is as follows:
This value tells us at what point the company stops losing money - either because of the volume of its sales or because its prices are high enough to make a profit. The break-even point is also known as the break-even point.
In this article we will learn in detail the profitability threshold, how to calculate it, and several ways to reach it in the shortest time possible.
What is the break-even point?
A company reaches the break-even point when sales revenue exceeds costs.
In other words, the break-even point is when the company stops making losses and becomes a profitable business. There are two main ways to calculate this value:
Break-even point by sales volume : This is mainly used to determine the amount of income you need to generate. For example, €10,000 per month.
Break-even point per unit price: This lets you know the quantity of products you need to sell to be profitable. For example, 100 units per month.
With this in mind, let's look at the break-even point formula and how to calculate it in both cases.
To understand the break-even point formula in a simple way, we are going to use a simple and practical example.
A practical example: a shoe factory
Imagine that a businessman has a small russian whatsapp number street-level business that makes shoes. In this business, there are several income and expenses to take into account:
Monthly fixed costs ( FIXED COST ): are the expenses that the business has every month, regardless of the amount of sales. An example of this is the rent of the premises, the telephone line, or the electricity bill.
Your variable costs ( VARIABLE COST ): Variable costs are those that depend on the volume of business. For example, the materials to produce a shoe or the shipping costs of the product.
The unit sales price ( PRICE ): is the value for which the product is sold, in this case a shoe.
Profit margin ( MARGIN ): The profit margin is the money left over once a shoe is sold and variable costs are subtracted from the sales price.
The numbers
Let's assume that in our example the values are the following, in order to then calculate the profitability threshold:
With these numbers in hand, let's calculate the break-even point in sales volume and unit sales.
Achieving profitability in sales
As we have said before, the break-even point in sales volume is the amount of revenue that must be generated to cover expenses. The formula to calculate this value is as follows: