Break Even

What is actually break even ?

Break even is as a concept is showing the minimum amount of benefits  from an activity in order to cover the effort of the activity. break_even

In business terms it show the minimum amount of needed output that covers your costs of that specific output.  The break even shows the minimum amount of sales that your business needs to do to cover its costs and start making profits.

To understand better the concept of Break Even you must be familiar with some basic economics terms like fixed costs, variable costs, total costs, income, profit , loss, input, output.

In the graph on the right you can see that the break even point is the point at that income is crossing the total costs line. The point of intersection is called Break Even Point . At this point the income equals your total costs and your profit is zero. Anything below that point means losses and anything above means profits.

When speaking about break even analysis we speak also about the  following :

  • break even sales defines the minimal amount of sales ( expressed in value or quantities ) that is able to cover the total costs (fixed and variables costs). At this level your profit is zero. From this point on you start to make profits.
  • break even output identifies the needed output (in terms of quantities or value) that you need sell to have to cover your costs (fixed and variable costs)
  • break even price is the minimal price for your sales where your profit is zero . Anything below this price brings you losses.

Why is break even analysis important ?

Break even is critical when running a business because it shows you the terms (price, sales, output) that are needed to have at least a zero profit. Anything below that point means your making losses and as we all know business is not about making losses, everybody loves profits.

Break even is important because it can help you to clarify your cost structure, it helps you ( why not ) to improve your cost position by making you think about new ways of how to lower your  Break-Even Point to be able to increase your profits.

As every turning point your break even point is a critical point in your business path that you have to approach very carefully and decide if you go towards losses of towards profits.

Sometimes it is not that easy to “see” the right break even point because of your cost positions that are either not properly identified or are very complex. The break even point as something that you should be very honest with yourself, asses it very clearly and act upon it if it is not as expected.

Handled properly the break even analysis can bring you a lot of benefits and advantages for your business that can help you improve.

For professional support in assessing your break even point and transforming it  into a TOP TOOL that supports your business get in touch with TopCFO .

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