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Break-even point and how to calculate it? Break-even point: calculation formulas and control methods Critical sales volume in monetary terms formula.

The profitability threshold, or break-even point, is the volume of products/services sold, upon reaching which the company covers all its expenses, but does not yet have a profit. Using this indicator, you can calculate whether the chosen methods of production growth are suitable for the enterprise and how sustainable the course of development is.

The last parameter allows you to record the moment of financial stability, that is, when the sales volume exceeds the minimum profitability. Next, the term “break-even point” and methods for calculating it will be discussed in detail.

What is the break-even point

The break-even point is the volume of sold products/services at which the resulting profit (not to be confused with income) goes from a negative value to zero.

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Profit is calculated by deducting all expenses from the company's income. There are two types of break-even point:

V in kind;
in monetary terms.

The break-even point is determined to establish the quantity of products/services with the sale of which income and expenses will become equal. Naturally, this applies to a situation where initially expenses were greater than income. As a result, after exceeding the break-even point, the business becomes profitable. In contrast to this state, the business operates in the negative until the equilibrium ratio has not yet been achieved in the company.

The break-even point shows how stable the company's position is in financial sector. And if this value grows, then this is a sign that the company has difficulties in generating income.

At the same time, the break-even point is not fixed; its data changes in relation to the growth of the enterprise. And its value is influenced by many factors - growth in trade turnover, opening of new branches, changes in pricing, etc.

The break-even point, in turn, affects a number of positions in the company.

If this indicator is calculated correctly, it can be seen whether it is reasonable to invest in the project given the current state of finances.
This parameter identifies problems in the company that affect changes in its value.
When establishing the break-even point and the volume of sales required by the company, it becomes clear how much it is necessary to increase or decrease the quantity of products sold, the scale of production, subject to a revision of their cost. In the opposite situation, it is possible, on the contrary, to identify the impact of changes in production volume on price formation.
The break-even point shows to what minimum limit the company's profit can be reduced, but at the same time still maintain positive work, without losses.

A graph that allows you to clearly see the appearance of the break-even point

Expert opinion

Correct 6 mistakes that prevent your company from increasing profits by the end of the year

Oleg Braginsky,

founder of the School of Troubleshooters, director of the Braginsky Bureau

After half the year has passed, interim results are usually summed up and an analysis of the company’s work, its achievements and failures is carried out. We must remember that there are still six months for profits to grow and, at the end of the year, to be profitable. But there are some mistakes or incorrect actions that can prevent this from happening. The main ones can be seen in the checklist (see appendix), and the 6 main mistakes are as follows.

Mistake 1. Annoying monotonous actions.

A company can constantly do the same things - find customers only through the sales funnel, not listen to customers to create a more customer-friendly atmosphere, continue to interact with consumers through different channels instead of creating a unified one. At the same time, all departments are separated, each working on its own - advertising, service, and sales.

For example, in the middle of winter, a buyer came to one of the agricultural holdings on the b2b market to purchase fertilizer. The head of the enterprise, in the process of communicating with a client, who turned out to be the director of a state farm, learned that the latter got to the holding’s website thanks to the Internet. He made the purchase, and after that the marketing specialists of the agricultural holding began to attack him regularly, sending emails and communications over the network and offering tools, fertilizers, or seedlings. The client did not like this, it caused irritation, since unnecessary goods were offered, and fertilizers were offered at the wrong time. Marketers had to take into account the information received from customers, make advertising targeted and retain this customer.

Clients do not like it when the same identical actions are performed against them with enviable regularity. To prevent this from happening to you, over the next six months, actively communicate with customers at all stages of cooperation. Otherwise, your customers will go to your competitors.

A good solution would be to use Client Journey Map (CJM). McKinsey claims that B2B firms using CJM experience a 10% increase in profits. CJM helps to look at the process through the eyes of the buyer, to outline and apply the customer experience. To do this, perform the following analysis:

marketing channels that the client used when he first contacted your company;
what exactly the person liked about the site;
what the customer asked you before making a purchase;
what products, services, what promotions are of interest to the client;
what did not suit the customer during the purchase, what objections did you encounter.

Client Journey Map translated from English is called a client journey map and is a technology in the field of marketing that allows you to make working with consumers as simple as possible, increase their loyalty to the company, and help them interact with your company.

To obtain the data necessary to implement all of the above, your employees must constantly note all the moments and processes of a client’s contact with the company. To do this you should install CRM system, set up a website and all communication technologies:

record all information about clients that is available;
write down in the scripts the questions that the sales employee should ask first-time applicants;
combine data about what steps a customer takes on your website with the actions of salespeople working with customers coming from the sales funnel.

This way, you can see the user's journey from their first visit to making a purchase. It is worth breaking down customers into sectors depending on how similar their behavior is. And for each group, draw up a map, best in the form of a diagram or graph, which will show all the moments of contact between customers and your company and their response actions. In the future, the information obtained can be used for clients with similar behavior.

This method will allow you to combine the efforts of different services of your company, because when joint activities Marketing and sales departments and their use of complete information, the results of their work will only improve.

Mistake 2. Insufficient detail in the buyer persona.

Customers in companies are usually divided into existing, former and new. But more detailed differentiation is not carried out, plus this principle will not apply to sellers, but in vain. Consumer behavior differs not only according to the specified criteria, but also depending on the region in which they live, on which manager they communicate with, and at what stage of the purchase they are at. And the same criteria apply to sellers. Taking these nuances into account will help maintain customer loyalty and improve service.

To solve this problem, it is worth starting from the scope of your company’s activities and its mission. When setting a goal to increase sales in certain territories, it is advisable to detail the list of clients according to the following parameters:

their location;
what kind of purchases they make in this area;
Which sellers are they most willing to contact and make purchases with?

This will make it clear what the client looks like in a particular region. And already based on this portrait potential buyers You can offer exactly the products that are most likely to interest them. At the same time, it is worth assigning to the client exactly the manager whom he sympathizes with, because this will help increase sales. In this case, the client will see that you have high-quality service and that he is valued in your company.

If the company’s current goal is to improve the work of sales managers, then the following approach can be used. Specialists should be divided into groups. For example, some are better at targeting male customers, while others are better at targeting female customers. To organize the work, incoming calls must be addressed to the administrator, who will distribute them to the most suitable sellers depending on the gender of consumers.

Taking into account exactly this information allows you to retain customers and increase sales. Therefore, it is necessary to analyze data on the behavior of buyers and sellers and choose the right managers to work with a particular customer.

Mistake 3. Not being interested in the opinions of customers.

When creating new types of products/services, a company usually focuses on its own views, and not on the wishes of customers or their needs.

That is, in most cases, no one asks clients for their opinions or listens to the feedback they voice. As a result, the company produces products that are not in demand and are inconvenient for customers. It is imperative to listen to the wishes of large clients. Let there be at least one full meeting with your most important customers.

A solution might be to invite your highest-earning clients to a meeting of sorts at least once a year. If this year you have not yet collected the opinions and feedback of your customers for analysis, then do it as quickly as possible. As an option, you should organize a business weekend at a hotel in the city or with a trip somewhere, have a buffet and discuss your products and services with guests, ask them to evaluate your company’s service, business development, find out their opinion about the products that you are planning release. At such a meeting you will be able to find out the following information:

what improvements the company needs;
what changes to make in goods being prepared for release;
how necessary are the products already on the market, etc.

You can get this information during regular customer surveys, but the fact is that large customers like to feel appreciated and receive attention. Therefore, it is easier to achieve maximum loyalty from them by showing that their opinion as experts is important to you.

Mistake 4: Retaining customers who are no longer valuable.

Often in times of crisis, companies strive to retain any customers, despite the fact that they do not make a profit. Or, on the contrary, they are trying to attract new customers without trying to retain the old ones. However, the flow of customers requires constant attention on your part. It is worth starting to work according to the following scheme - leave profitable clients, and if they are gone, then return them and delete unnecessary ones. Before the end of the year, you need to edit your customer base according to this principle.

The solution is to retain those consumers who regularly buy your products, who have a loyal attitude towards your company and who advocate for your brand. The customer base should be divided into parts, highlighting the amount of the check, the frequency of purchases made, the presence of debt or its absence to your company.

It is worth stopping to retain those customers whose check amount and, therefore, the margin are insignificant, even if they make purchases frequently, or those who contact you very rarely. To do this, you can change the terms of sales to be more profitable for the company. For example, increase the average purchase amount. Or change the minimum order conditions from one product to several. Loyal customers will accept these conditions, and the rest will drop out.

But if you see that customers are leaving in large numbers or that you have lost your best customers, then the situation needs to be analyzed. It’s worth calling buyers from the b2b sector to find out the reasons for their dissatisfaction. If it suddenly turns out that best clients are now collaborating with a competitor, ask why they left and what you are missing. This question can be asked directly to customers, or you can purchase a competitor’s product for comparison. The b2b sphere allows you to return lost customers using Internet tools - mailings email, organizing surveys, notifications about discounts and promotions, etc. You just need to focus on attracting buyers who can bring profit and not be useless.

Mistake 5. Linking managers to clients.

Managers in the b2b sector usually work with their own client base. At the same time, customers do not like it when the seller changes. And managers act according to an already established scheme, often forgetting to offer new services or products. That is, you pay them for simply serving a regular customer.

To solve this problem, you can analyze the work of sellers over the past six months. And if it is clear that the client is buying the same thing and for the same amount as always, then assign another manager to him. Or you can motivate your employees by tying the receipt of a cash bonus to their performance results. In this case, understanding that his remuneration depends on the amount spent by the buyer and on the quantity of goods sold, the manager will make every effort.

Mistake 6: Content is unattractive to readers.

Today, many companies use social media - blogs, networks, and start their own channel on YouTube. But at the same time, the content posted by marketers is boring and uninteresting - ordinary reports, dry articles, speeches of directors, etc. That is social media are used formally, without the goal of attracting customers.

To solve this problem, you need to create interesting and non-standard content in order to get noticed. In this case, you must adhere to three rules.

Management should not appear on social networks. Subscribers already subconsciously associate a speech or article from the director with boring content. And they need interesting and lively material to forward to their friends. Therefore, the best content would be to post photos, entertaining and educational information.
Present your company's products or services in a unique way, from an interesting angle. You can show the production process or some unusual approach to using products. It is best to come up with at least ten such ways.
Hire actors to produce interesting video content. Although it is more expensive, the result is worth it. Actors will be able to talk more convincingly about a company or product than ordinary employees; they will be able to convey to the audience the emotions of owning the products. Plus, such content will not only be educational, but also entertaining; it will be constantly “liked” and “shared,” especially by fans of the actors and their subscribers.

It is known that the production of products implies investment in its production and sale. Every entrepreneur, intending to create good, pursues the goal of making a profit from the sale of goods/services. The break-even chart helps to see in value and physical terms the revenue and volume of production at which the profit is zero, but all costs have already been covered. Accordingly, having crossed the break-even point, each subsequent unit of good sold begins to bring profit to the enterprise.

Data for the graph

To draw up sequential actions and get an answer to the question: “How to build a break-even chart?” it requires an understanding of all the components needed to create a functional dependency.

All the company's costs for selling products are gross costs. Dividing costs into fixed and variable allows you to plan profits and is the basis for determining the critical volume.

Renting premises, insurance premiums, depreciation of equipment, wages, management - these are the components fixed costs. They are united by one condition: all listed expenses are paid regardless of production volumes.

Purchase of raw materials, transport costs, remuneration of production personnel are elements of variable costs, the size of which is determined by the volume of goods produced.

Revenue is also the initial information for finding the break-even point and is expressed as the product of sales volume and price.

Analytical method

There are several ways to determine the critical volume. The break-even point can also be found using the analytical method, that is, through a formula. In this case, a schedule is not required.

Profit = Revenue – (Fixed expenses + Variable expenses * Volume)

The determination of break-even is carried out under the condition that the profit is zero. Revenue is the product of sales volume and price. This results in a new expression:

0 = Volume*Price – (Fixed costs + Variables * Volume),

After elementary mathematical procedures, the output is the formula:

Volume = Fixed costs / (Price – Variable costs).

After substituting the initial data into the resulting expression, the volume is determined that covers all the costs of the good being sold. You can go from the opposite, setting the profit not to zero, but to the target one, that is, the one that the entrepreneur plans to receive, and find the volume of production.

Graphical method

An economic tool such as a break-even chart can predict the main performance indicators of an enterprise, taking into account constant market conditions. Basic steps:

The dependence of sales volumes on revenue and costs is constructed, where the X axis reflects data on volume in physical terms, and the Y axis shows revenue and costs in monetary terms.
A straight line is constructed in the resulting system, parallel to the X axis and corresponding to fixed costs.
The coordinates corresponding to variable costs are plotted. The straight line goes up and starts from zero.
The straight line of gross costs is plotted. It is parallel to the variables and originates along the ordinate axis from the point from which the construction of fixed costs began.
Construction in the system (X, Y) of a straight line characterizing the revenue of the analyzed period. Revenue is calculated on the condition that the price of products does not change during this period and output is produced evenly.

The intersection of direct revenues and gross expenses projected on the X-axis is the desired value - the break-even point. An example graph will be discussed below.

Example: how to build a break-even chart?

An example of constructing a functional relationship between sales volumes and revenues and costs will be produced using the Excel program.

The first thing you need to do is consolidate data on revenue, costs and sales volumes into a single table.

Next, you should call the “Graph with Markers” function through the toolbar using the “Insert” tab. An empty window will appear; right-click on the data range, which includes the cells of the entire table. The X-axis label changes through the selection of data related to the output volume. After that, in the left column of the “Select data source” window, you can delete the output volume, since it coincides with the X-axis. An example is shown in the figure.

If we project the point of intersection of direct revenues and gross costs onto the x-axis, then the volume of approximately 400 units is clearly determined, which characterizes the break-even of the enterprise. That is, having sold over 400 units of products, the company begins to operate in profit, receiving revenue.

Example using formula

The initial task data is taken from a table in Excel. It is known that production is cyclical and amounts to 150 units. The output corresponds to: fixed costs - 20,000 monetary units; variable expenses – 6000 den. units; revenue – 13,500 den. units It is necessary to calculate break-even.

Determination of variable costs for the production of one unit: 6000 / 150 = 40 den. units
Price of one sold good: 13,500 / 150 = 90 den. units
In physical terms, the critical volume is: 20,000 / (90 - 40) = 400 units.
In value terms, or revenue for this volume: 400 * 90 = 36,000 den. units

The break-even schedule and formula led to a unified solution to the problem - determining the minimum production volume that covers the cost of production. Answer: 400 units must be produced in order to cover all costs, the revenue will be 36,000.00 den. units

Limitations and conditions of construction

The simplicity of estimating the level of sales at which the costs of selling products are reimbursed is achieved through a number of assumptions made for the availability of the model. It is believed that production and market conditions are ideal (which is far from reality). The following conditions are accepted:

Linear relationship between output and costs.
The entire volume produced is equal to the volume sold. There are no stocks of finished products.
Product prices do not change, and neither do variable costs.
No capital costs associated with purchasing equipment and starting production.
A specific time period is adopted during which the amount of fixed costs does not change.

Due to the above conditions, the break-even point, the example of which was considered, is considered a theoretical value in the projection of the classical model. In practice, calculations for multi-item production are much more complicated.

Disadvantages of the model

Sales volume is equal to production volume and both quantities change linearly. Not taken into account: buyer behavior, new competitors, seasonality of release, that is, all conditions affecting demand. New technologies, equipment, innovations and others are also not taken into account when calculating production volumes.
Finding the break-even position is applicable for markets with stable demand and low level fight against competitors.
Inflation, which may affect the cost of raw materials and rent, is not taken into account when establishing one product price for the period of the break-even analysis.
The model is inappropriate for use by small businesses whose product sales are unstable.

Practical use of the break-even point

After enterprise specialists, economists and analysts have made calculations and constructed a break-even chart, external and internal users obtain information to make decisions on the further development of the company and investment.

Main purposes of using the model:

Calculation of product prices.
Determining the volume of output that ensures the profitability of the enterprise.
Determination of the level of solvency and financial reliability. The farther the output is from the break-even point, the higher the margin of financial strength.
Investors and creditors - assessment of the development efficiency and solvency of the company.

“How many products need to be produced and sold? What price should I set for it to start making a profit?” — these questions concern every entrepreneur. The answer can be given by calculating the break-even point (the situation in which expenses will equal income).

After this point has been found, you can begin to optimize the enterprise’s activities: produce more or less products, or change prices.

At the moment when revenue exceeds the break-even point, we can say that the company is making a profit. Otherwise, it suffers losses.

Economic model of the break-even point

To calculate the break-even point, several axioms should be defined:

Expenses and income are described as a linear function (i.e., the rate of change is constant);
In the analyzed period, prices, as well as production costs, remain unchanged;
The structure of manufactured products, as well as production capacity do not change;

3 stages of calculating the break-even point according to A. D. Sheremet

Each calculation requires a certain sequence.

Thus, the Russian economist A.D. Sheremet identified 3 stages to optimize the activity of an enterprise by calculating the break-even point:

First you need to collect information about profits received by the enterprise, as well as the costs incurred;
Next, you need to calculate fixed and variable costs, find the break-even point and safety zones;
The final stage should be determining the quantity of products necessary to implement to ensure the financial stability of the enterprise;

It is clear from this that ultimately the enterprise must be determined to have a minimum income at which it can continue its activities.

Methods for calculating the break-even point

The main indicators that will have to be used when determining the break-even point are:

P – product price;

X – volume of manufactured products required for sale;

FC – fixed costs (do not depend on the quantity of products produced, for example, wages of employees);

VC (X) – variable costs (increase with each unit of production);

S – revenue for a certain period;

R – profitability.

You can find the break-even point in various ways, depending on the available information.

First method: costs and sales volume are known

Having information about costs, as well as the quantity of products that need to be sold, it is possible to determine the minimum price for a product that allows the enterprise to work “to break even.”

The formula itself looks like this:

P = (FC + VC (X)) / X.

Second method: price and costs are known

Here, knowing the price and costs, the volume of product sales is determined, which will allow you to get zero profit.

Formula:

X = FC / (P – VC).

The absence of the variable “(X)” is explained by the fact that the formula takes into account only the costs of producing 1 unit of output.

In practice, the price of a product is set in advance based on costs and market realities, so determining quantity is the most common task facing management.

Calculation of the break-even point for the service and trade sectors

The method of determining the break-even point for the service and trade industries is complex and uncertain. The number of goods in trade can reach several thousand and calculating the cost of each product turns out to be impossible.

In the service industry, costs cannot be accurately determined due to the uniqueness of each service provided. In these cases, it is preferable to use profitability indicators. Profitability is the difference between price and cost of production.

Formula:

S = FC/R.

Calculation of break-even point in Excel

To perform the calculation, you must determine the main indicators.

Let's assume that:

Fixed costs = 100;
Variable costs = 50;
Price = 75;

You need to create and fill out a table:

Fixed costs = C 2
Variable costs = A 9*$C$3
Total costs = B9+C9
Income = A 9*$C$4
Net profit = E9 – D9

Based on this table, it can be seen that the break-even point is reached with the release of the 4th product, and subsequent release increases the organization’s profit.

Practical benefits of using the break-even point

Determining the break-even point is one of the main tasks facing the managers and employees of the enterprise.

Thus, determining the equilibrium level of income and expenses will allow startup entrepreneurs who enter the market with a unique product to set the optimal price for their product.

In large organizations, it is very important to establish the process of production and sales of products. The long-term nature of the activity requires careful attention to planning production and sales of products.

For example, a beverage manufacturer must determine the price and production volume that will best satisfy demand and maximize profits. Excess production leads to unnecessary costs, and insufficient supply leads to lost profits.

In addition to the organizations themselves, this indicator is used by investors, banks, business incubators to resolve the issue of providing cash or premises.

Strengths and weaknesses of the break-even point model

Despite this, this model has serious disadvantages:

The linearity of the function does not allow us to take into account changes occurring in the market. Characteristics such as seasonality, inflation, increased competition are not displayed in any way on the graph;
Business costs may change over time, which is also not taken into account when calculating the break-even point;
The limitation of demand only by price in the model does not reflect the real situation on the market. Demand is also influenced by other important characteristics of the product, such as quality or fashion.

Determining the break-even point

You can use a chart to determine the break-even point. To build it, you need to have information about fixed and variable costs, as well as prices for 1 unit of production.

The graph displays 2 straight lines:

Cost;
Quantity of products (note: tables);

At the point where they intersect there will be a break-even point. The higher the direct revenue relative to it, the greater the profit the organization will receive.

Plotting a break-even point chart

Calculating the break-even point for a grocery store (example)

To calculate a store's break-even point, it is necessary to determine its fixed costs. Let's take a grocery store as an example.

Let's assume that:

Rent of premises – 80,000 rubles;
Salary for sellers – 60,000 rubles;
Insurance premiums (30%) – 18,000 rubles;
Costs for public utilities– 10,000 rub.
Purchase of food products - 800,000

The total costs will be 968,000 rubles. The rate of return will be set at 50%.

According to the formula, we get:

S = 968000 / 50% = 1936000 rub.

With an average check of 500 rubles. the store will need to serve 3,872 customers per month.

Calculation of the break-even point for an enterprise (example)

Let’s say an enterprise produces 1 type of product, the cost of 1 unit of which is 50,000 rubles. The price is 100,000 rubles. Fixed costs - 2,000,000 rubles.

It turns out:

X = 2000000 / (100000 - 50000) = 40 units of production.

Bottom line

To summarize, it should be said that the break-even point model is useful for planning the activities of an organization: it allows you to determine the required volume of output to make a profit, and also helps determine the price of the product.

In addition, the relative simplicity of this calculation allows you to derive the necessary indicators quite quickly and literally on your knees.

“The more you sell, the more you earn,” any entrepreneur understands this formula. But, usually, not everyone calculates exactly how much they need to sell in order to break even and not make a loss. The sales volume at which the business breaks even is called the break-even point. Knowing it, an entrepreneur can better plan prices for goods, the volume of advertising, bonuses and many other important parameters. Let's figure out how to calculate the break-even point for any business.

Variable costs

Variable costs are business costs, the volume of which depends on the production of a unit of product or the provision of a service. They are variable because they will change as production volume changes. This usually includes the purchase of raw materials, payment for the work of subcontractors or piece-rate personnel, transportation costs, etc.

To better understand all the calculations, consider a small furniture production“Dobry Buk”, which produces cabinet furniture to order. Summing up the results of a month of work, we see that, having completed 15 orders and received revenue of 150,000 rubles, we spent 30,000 rubles on the purchase of raw materials and 45,000 rubles were paid as piecework payments to the craftsmen. These costs were directly related to fulfilling orders and therefore constituted variable costs. The total amount is 75,000 rubles - or 50% of the proceeds. For clarity, we will keep track of all amounts in an Excel table.

Take a close look at the costs in your business and calculate the variable portion. If you are engaged in trade, this will include the cost of purchasing goods. If you provide services, then most likely payment will be made to those who provide these services, if this payment can be accurately attributed to the fact of providing the service. For example, if you have a website development studio, design studio or any design organization, the variable part should include all payments for the project (an example of how the accounting of personnel payments for projects in such a company is organized is in one of our previous ones).

If we subtract direct variable costs from revenue, we get an indicator called marginal(or it is also called gross) profit. This is an important indicator that speaks about the performance of a business, so it is important to count it. If you have several areas of business, calculate the marginal profit for each of them, evaluate and compare them according to this parameter.

In “Good Beech” the marginal profit is 75,000 rubles. Expressed as a percentage of revenue, contribution margin is called - marginality. In our example it will be equal to 50%. Margin calculation will be useful to us to determine the break-even point.

Fixed costs

Obviously, in addition to the expenses that are included in the variable part, the company may have other expenses: rent of an office, warehouse or production space, fixed salaries employees, a bank account, advertising your goods or services. All of these are fixed costs. They are also called indirect fixed costs, that is, those business costs that cannot be directly attributed to the sale of a specific product, batch, service or project. And these expenses are called constant because if in a certain month you have not concluded a single contract, you will in any case pay a salary to an accountant, pay for an office, etc.

Let’s see what fixed costs our company “Dobry Buk” has. It took 30,000 rubles to rent the premises, the salaries of the foremen and the head of the company totaled 55,000 rubles, and another 10,000 rubles were spent on advertising. Total fixed costs in the reporting month were 95,000 rubles or 63.3% of revenue. Let's write everything in the table:

Break even

Now that we have information about variable and fixed costs, we can calculate the break-even point.

The break-even point is the sales volume at which the business earns nothing, but also does not operate at a loss. This is achieved due to the fact that 100% of the revenue received from customers for this volume of orders covers variable and fixed costs, but nothing is left for profit. The break-even point can be expressed in money (cash equivalent) or the number of orders (in-kind equivalent). For most small businesses, it is better to calculate the break-even point on a monthly basis.

The formula for calculating the break-even point is quite simple: to determine the break-even point, you need to divide the fixed costs by the marginality.

Break-even point = Fixed costs / Margin

Let us recall that marginality is the ratio of the difference between revenue and variable expenses to revenue, expressed as a percentage.

Margin = (revenue − variable expenses) / revenue × 100

Let's calculate the break-even point for our company.

Step 1. Marginality = 150,000 rubles (revenue) – 75,000 rubles (variable expenses)) / 150,000 rubles (revenue) x 100% = 50%

Step 2. Break-even point = 95,000 rubles (fixed expenses) / 50% (margin) = 190,000 rubles.

So, the break-even point for our company is 190,000 rubles in cash equivalent. It is this amount of revenue that needs to be received in order not to work at a loss when current level costs.

It is obvious that Dobry Buk was operating at a loss this month: the number of orders received did not bring in the required amount of revenue to cover all expenses.

Let's try to change the situation by increasing the advertising budget to attract more orders. Suppose we increase by 5,000 rubles advertising budget and in the end we will receive 5 more orders. This action will increase fixed costs this month, but will also bring in more orders and increase revenue by up to 200,000 rubles. If we maintain the same level of margin, we will get the following structure of expenses and income:

Let’s calculate the break-even point for February again:

TB = 100,000 rubles (fixed expenses) / 50% (marginality) = 200,000 rubles.

In total, in the current conditions, with revenue of 200,000 rubles, our production will reach the break-even point.

The break-even point can be represented not only in monetary terms, but also in natural equivalent. For “Good Beech” this will be the number of transactions (orders) received equal to 20 with an order amount of 10,000 rubles.

In addition, analysis of the break-even point can be carried out in charts. If we plot the volume of revenue along the ordinate axis, and the number of products/orders along the abscissa axis, we will get a graph illustrating the relationship between revenue, fixed and total costs (variables + constants).

The break-even point on the graph is the intersection point of revenue and total costs.

The graphs show how the difference between revenue and total costs changes as the number of orders increases. This difference is the operating profit of the organization.

Knowing the break-even point, you can manage your business: increase sales, increase average bill, change something in variable and fixed costs, etc. The higher the revenue from the break-even point, the greater the margin of safety the business has, and the more stable it is.

The main factor of sustainability is the level of fixed costs. If it is large, the business needs a large turnover to cover it. If there are not many fixed costs, then the company will not suffer losses if revenue falls. All entrepreneurs understand this fact, but not everyone can express this in specific numbers for their business.

Knowing the break-even point is important and useful: you can determine at any point in time whether the business has attracted the necessary volume of orders or sales to meet its needs or not. And if not, then how much does he have to sell to make a profit?

Conclusions: what does knowing the break-even point provide?

It is easier to determine at what prices to sell goods or services based on costs;
It is easier to plan the volume of sales at each specific point in time and answer the question “How much do you need to sell to break even?”;
You can monitor changes in the break-even point to find bottlenecks in the business;
You can analyze the company's sustainability in numbers.

Break even (break-even point) is the minimum volume of production and sale of goods (work, services), at which costs will be offset by income, and with the production and sale of each subsequent unit of production, the organization begins to make a profit. The break-even point can be determined in units of production, in monetary terms, or taking into account the expected profit margin.

The economic meaning of the break-even point The break-even point is the critical production volume. When the break-even point is reached, the profit and loss of the organization are zero. The break-even point is an important value in determining financial situation enterprises. The excess of production and sales volumes above the break-even point determines the financial stability of the enterprise.

The break-even model is based on a number of initial assumptions:

the behavior of costs and revenues can be described by a linear function of one variable - output volume;
variable costs and prices remain unchanged throughout the entire planning period;
the product structure does not change during the planned period;
the behavior of fixed and variable costs can be accurately measured;
at the end of the analyzed period, the enterprise has no stocks of finished products left (or they are insignificant), i.e., the sales volume corresponds to the production volume.

Using the algebraic method, the point of zero profit ( break-even point formula) is calculated based on the following relationship:

I = S - V - F = (p * Q) - (v * Q) - F = 0
Where,
I is the amount of profit;
S - revenue;
V - total variable costs;
F - total fixed costs;
Q - production volume in physical terms;
v - variable costs per unit of production;
p - unit price (sales price).

From here we find the critical volume (break-even point in physical terms):

Q" = F / (p-v)

where Q" is the break-even point (critical volume) in physical terms.

The break-even point (the critical volume of production and sales of products or the profitability threshold) can be calculated not only in physical terms, but also in value terms:

Q" = Q" * p

Q” = F / [(p-v) / p]
Q” = (F*S) / (S-V)
where Q” is the break-even point in value terms (the critical volume of production and sales of products).

The economic meaning of this indicator is revenue at which profit is zero. If the actual revenue of the enterprise is greater than the critical value, it makes a profit, otherwise - a loss.

The above formulas for calculating the critical volume of production and sales in physical and value terms are valid only when only one type of product is produced or when the output structure is fixed, i.e. the proportions between different types of products remain unchanged.

If several types of goods are produced with different marginal costs, then it is necessary to take into account the structure of production (sales) of these goods, as well as the share of fixed costs attributable to a specific type of product. The closure point of an enterprise is the volume of output at which it becomes economically ineffective, i.e. at which revenue is equal to fixed costs:

Qз = F / p

where Qз is the closing point.

If the actual volume of production and sales of products is less than Q", the enterprise does not justify its existence and should be closed. If the actual volume of production and sales of products is greater than Q", it should continue its activities, even if it receives a loss.

Another analytical indicator intended for risk assessment is the “safety edge”, i.e. the difference between the actual and critical volumes of production and sales (in physical terms):

Kb = Of - Q"

where Kb is the safety edge; Of - the actual volume of production and sales of products.

K = Kb / Qf * 100%

where K is the ratio of the safety edge to the actual volume.

The safety margin characterizes the risk of the enterprise: the smaller it is, the greater the risk that the actual volume of production and sales of products will not reach critical level Q" and the enterprise will be in the loss zone.

Data on the value of marginal income and other derived indicators have become quite widespread for forecasting costs, sales prices of products, acceptable increases in the cost of production, assessing the effectiveness and feasibility of increasing production volume, in solving problems such as “produce yourself or buy” and in other optimization calculations management decisions.

This is largely due to the comparative simplicity, clarity and accessibility of break-even point calculations. However, it must be borne in mind that the break-even model formulas are only suitable for those decisions that are made within an acceptable range of prices, costs and production and sales volumes. Outside this range, unit selling price and unit variable costs are no longer assumed to be constant, and any results obtained without such limitations may lead to incorrect conclusions.

Along with its undoubted advantages, the break-even model has certain disadvantages, which are associated, first of all, with the assumptions underlying it. When calculating the break-even point, we proceed from the principle of a linear increase in production and sales volumes without taking into account the possibility of a jump, for example, due to the seasonality of production and sales.

When determining the conditions for achieving break-even and constructing the corresponding schedules, it is important to correctly set data on the degree of utilization of production capacity.

Analysis of the break-even point is one of the important ways to solve many management problems, since when combined with other methods of analysis, its accuracy is quite sufficient to justify management decisions in real life.