The threshold of profitability is the basis of the firm's work

The threshold of profitability is the profit from sales, which completely covers all the expenses of a corporation. In this case, it should be borne in mind that this firm does not receive profit, but it does not remain at a loss. In other words, it can be said that this is a zero indicator, which is a sign that the enterprise is working, but only the turnover of money "give-get," without leaks and proceeds.

Pure theory

Drawing an analogy with mathematics, without which it is extremely difficult to imagine the economy, we come to the conclusion that the profitability threshold is zero. This borderline value is neither a good sign nor a bad sign. In which way things will move forward, depends on the specific situation. If the next transaction of the enterprise turns out to be successful, the profitability threshold will be exceeded, that is, the revenue will be received. If the deal waxes or fails for other reasons, this indicator will be below zero, which means working at a loss.

We carry out a short calculation

It should also be noted that the profitability threshold is the sum of the components with which it is calculated. First, constant costs are determined , which do not depend on the production volumes. Among them we can name rent of a premise, service of equipment, the salary to employees, etc. After variable costs are calculated. They and that depend on the volume of output, and also in the future affect profit.

How things stand in practice

Modern creditors, who support small and large enterprises, always connect such concepts as the threshold of profitability and the margin of financial strength. The explanation is much simpler than it sounds: it means that the enterprise's revenues exceed this very zero threshold, which shows that the work is not at a loss. After all, each sponsor is important to know that the company will be able not only to pay interest for the use of credit funds, but also to repay the principal debt within the agreed term.

Formulas and calculations

Now let's see how economists see this very threshold of profitability. His formula is very simple:

• Revenue x fixed costs / revenue - variable costs.

With the help of these indicators it is easiest to calculate the financial capacity of the enterprise. If we consider the profitability threshold from the so-called natural point of view, then we derive another formula:

• Constant costs / revenue per unit of output - costs per unit of output.

Some people are more easily guided through the analysis of these data.

Other options for determining profitability

When considering this economic equivalent in the form of a schedule, it becomes clear that the enterprise achieves its profitability when the income line crosses zero and rises above gross costs. At this stage, there can be no losses, the indicator can only grow. The threshold of profitability is the percentage that indicates the use of funds in the company. It is also sometimes expressed in profit per unit of funds that were invested for it. This information may be available to the management of the firm, as well as to banks and lenders that cooperate with it.