In order to help you the best, tell us what kind of business would describe you?

In order to help you the best, tell us what kind of business would describe you?

Knowing Your Company’s Break-Even Point

by | Jun 22, 2021 | 0 comments

No matter if your business provides a service or produces and sells a product, you have a break-even point (BEP). Knowing your break-even point will be critical in your success and your ability to make your company’s best financial decision. 

Making informed business decisions is difficult. You need to know and understand many factors to keep your business up and running and making a profit. Sometimes, business owners feel as if data and numbers are spinning around in your head ALL THE TIME. Keeping track of them, what they mean, and when to apply them can prove challenging at times. 

Define Break-Even Point

The break-even point is when the sales of a product or service equal expenses. Your company, at this point, has zero income. You are literally “breaking even,” hence the name of this KPI.

In addition to the obvious perk of knowing what you need to sell to avoid losses, knowing your break-even point has additional benefits as well. 

  • Show trends towards possible losses, such as decreasing sales and increasing expenses
  • Reinforce your idea to change your pricing structure.
  • Show you where to possibly reduce variable costs.
  • Create a competitive and profitable pricing strategy.
  • Use to price-out competitive bids.
  • Make cash-flow projections
  • It gives you the knowledge to know when to discontinue a product, make changes to it, or leave it just as it is. 

How to Calculate Break-Even Point

To move your company past zero, learning how much you need to sell to meet the costs of producing what you sell is essential. This cost may constantly be changing due to your variable costs, so you will continually need to be aware of your BEP. 

There are two ways to calculate your BEP. Dependent on if you are looking for your answer in units or dollars.

Cost per Unit 

Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

Cost per Unit 

Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

If you are unsure what your business’ fixed and variable costs currently are, ask your accountant, they will know. As a reference, fixed costs include such things as salaries, rent, utilities, and the cost of materials. Your variable costs will consist of such things as shipping and sales commissions.

4 Factors that Effect the B.E.P.

  • Increase in sales — 

Simply put, when you sell more of your product, your costs will increase. You need to purchase more of your raw materials, and you need to pay someone to produce the product. 

An increase in costs due to the rise in sales is not necessarily a good or bad thing. It is just is something to be aware of how it affects your break-even point.  

  • Production cost fluctuations — 

Anytime your cost of production changes, your break-even point will be affected. When production costs increase, it will cost your business more to make each product, increasing your break-even point.

The same goes for a decrease in costs, your break-even point will lower, so you are making more profit on each item sold.  

  • Equipment repair — 

The dreaded but common need to upgrade or repair your equipment can be overwhelming. These often unexpected costs can affect your BEP both in the actual cost of the repairs and in the downtime that often accompanies equipment failure or upgrades. 

In the long run, upgrades can reduce your BEP by making your production more efficient and saving time and labor costs. So be sure and do some research on when and on what upgrades to spend your money on. 

  • Changes in Labor Costs —

Just like changes in production cost affects your BEP, the same goes for changes in your companies labor costs. 

An increase will raise your BEP, and a decrease will reduce it. Unfortunately, most often, labor costs only increase. Finding the balance between paying your employees a fair wage and keeping your BEP at an acceptable level can be difficult but not impossible. 

Reducing your Break-Even Point 

One surefire way to increase the profitability of your company is to reduce your break-even point. When your product or service costs decrease, you are making a higher profit on each sale. 

Raise prices. 

This doesn’t necessarily decrease your BEP, but it does raise the profit made with each sale you make. Raising prices is not always an easy decision to make since you don’t want to drive away possible new customers. 

Before raising your prices, do your due diligence. Check your competitor’s prices, do the research, check your financials and speak with your CPA. They have so much knowledge to offer in these areas. They can run projections for you and analyze the situation.  

Decrease fixed costs

The best way to reduce your BEP is to lower your fixed costs. Lowering your costs means getting a better deal on your raw materials. 

So regularly do your homework on current prices. Check with your suppliers to make sure you are receiving the best price. Also, check out the prices of other suppliers. 

Increase sales. 

Honestly, this should always be a goal of any company regardless if you are focused on your break-even point or not. Increasing your sales is the most sure-fire way to lower your BEP, in turn increasing profits and finding success.

Doing this may increase individual costs in your marketing department, and if your commission-based, there will be an increase there as well. 

Final Thoughts

Knowing your business breakeven point is critical. Not only is it a significant “milestone” in the life of a company, but it is also an essential part of a solid business plan. When you know what you need to accomplish, the path to getting there becomes more evident. 

Reach out to your CPA, learn your BEP and make a plan together.

In order to help you the best, tell us what kind of business would describe you?

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