Calculation of break-even point

Despite the fact that the business is organized for profit, quite often the unpredictability of the market or the lack of effective management result in losses for the company. This situation can be called catastrophic, especially for beginning businessmen, because losses mean the investor's loss of own money, which is always painful. Unwillingness to part with their own funds and explains the attention that managers of the enterprise usually provide to losses. One can even say that preventing the company from entering the "negative zone" is the main priority of its commodity policy, and the main tool of this policy is the calculation of the break-even point.

Despite the great importance that the break-even point has in making managerial decisions, the break-even point calculation is quite simple. All you need to do is to divide your costs into fixed and variable ones. To the traditional traditionally include all costs that are not associated with an increase or decrease in the volume of your sales. What could it be? In fact, the spectrum of fixed costs is quite wide. This is the rent for using the office, and the moral wear and tear of equipment and wages to the manager, and the costs associated with the repayment of the loan. You can say that these costs are "hanging" on the company, and if it does not sell, it will certainly calculate the losses.

To the variable costs is everything that is directly related to sales. This, of course, the cost of raw materials and materials, as well as the payment of commission to sellers and the costs associated with the transportation of finished products. By all the rules of logic, such costs per unit of product should be less than its price. Thus, the more you sell, the more costs will be, but the more profit will be.

After you have divided the costs into groups, you can directly calculate the break-even point. To do this, divide all of your fixed costs by income from the sale of one unit of product, less the variable costs of its production and sale. For example, a product costs 100 rubles, but raw materials, wages to agents, etc. Are 60 rubles. Then the sale of each unit of the product will pay off 40 rubles of fixed costs. Suppose they are equal to 4000 rubles. In this case, you need to produce and sell 100 units of production, so that your profit equals zero. This is the break-even point.

The break-even calculation can also be carried out in monetary terms. We multiply the result we obtained earlier by the price and find out that we must receive 10,000 rubles in revenue in order to reach the breakeven point.

On the received indicators in the further it is necessary to be guided for planning of sales volumes. Of course, it is advisable that in your plans there is a figure significantly exceeding the breakeven point. It is not a planned value, it is the lowest level below which an enterprise has no right to go down. If you want to calculate the planned value of sales, then add the expected profit in calculations to constant costs. The result will be your expected sales.

Calculation of break-even point, among other things, allows you to determine the financial stability of the campaign. If fixed costs are a large part of the costs, then such a business is more risky, but at the same time it is also potentially more profitable when increasing sales volumes. However, note that a business with a high share of fixed costs must keep sales at a level much greater than the break-even point, otherwise unpleasant consequences can not be avoided.