What Is the Break-Even Point?
The break-even point is the sales figure that your company must achieve to cover all its costs, whether :
- Fixed: i.e. compulsory expenses such as salaries, insurance, rent for the business' premises, etc.
- Variables: these are expenses linked to sales, such as transport costs.
The break-even point is the point at which total costs and total revenues are equal. In other words, it's the point at which your business begins to generate a profit.
Why Know your Break-Even Point?
It is particularly important to know your company's break-even point if it is domiciled in Switzerland, as social security contributions are rather high. Moreover, depending on the canton, taxes can be a heavy financial burden.
However, in Switzerland as elsewhere, it is essential to know the break-even point in order to :
- Set concrete objectives
- Identify growth opportunities
- Better manage your resources
- Ensuring your company's financial health
- Anticipate the financial risks of your business
Why Know your Break-Even Point?
Although the break-even point and the break-even time are similar, there is a certain nuance between the two. Indeed, as we saw above, the break-even point is the point at which you'll be able to start making a profit.
The break-even time is closely linked to the breakeven point, as it is the precise moment (to the day or month) when your company reaches the break-even point. It's the length of time time that your business needs to pass to start generating profits.
How Do you Calculate your Break-Even Point?
Calculating the break-even point is easy enough, and all the more reason to do it. However, there are a few points to bear in mind factors such as changes in costs, whether fixed or variable, since they are bound to have an impact on the bottom line. If costs increase, it's best to adjust your prices upwards.
- Start by defining your fixed and variable costs
In other words, mandatory expenses and sales-related expenses.
- Calculate contribution margin
Forecast sales - Variable sales expenses
- Calculate contribution margin
(Contribution margin / Sales) x 100
- Calculate your break-even point
Break-even point = Fixed costs / Margin on variable costs
How Do you Calculate the Break-Even Point?
To calculate the break- even point, on the other hand, you need to use the result obtained above and the following formula :
- Break-even time
Break-even point = (Break-even point / Sales) x 365
This formula also underlines the fact that break-even point and break-even time, often confused, are two separatethings, although they are closely linked.
How Do you Calculate the Break-Even Point?
Knowing your company's break-even point and checking it regularly can help you to optimize and get to know your business in detail.
Setting a Sales Price
Knowing your break-even point can help you determine the right price for your products and/or services in order to cover your costs. This enables you to set prices strategically, taking into account your profit margins.
Reduce Fixed Costs
Calculating your break-even point allows you to differentiate between your fixed and variable costs. Knowing this data will enable you to find ways of reducing your costs through regular follow-up.
For example, you can move to a less expensive space, or renegotiate existing contracts with your suppliers. Remote working can also be a way of reducing the costs associated with your business. You can also automate certain administrative tasks.
Reduce Variable Costs
To reduce variable costs, you can analyze your consumption and look for ways to improve them. For example, identify any inefficiencies in the production process, or adopt energy-saving practices.
Assessing a Project's Viability
Before embarking on a new project or introducing a new service, check the profitability of the latter. It's better to assess the risks beforehand than to be surprised later.
Frequently Asked Questions
What influences the break-even point?
The main factors influencing the break-even point are fixed costs, variable costs and the selling price of products or services.
How can I lower my break-even point?
To lower your break-even point, you can reduce your fixed costs, cut your variable costs or increase your selling price.
Does the break-even point vary from one business sector to another?
Yes, each sector has its own fixed and variable costs, which have a direct impact on your company's break-even point.
How do you use the break-even point to assess a project's viability?
Before launching a new project, calculate the break-even point to determine whether it is financially viable. If the break-even point is too high in relation to sales forecasts, the project could prove risky.
Is break-even a sufficient indicator to assess my company's performance?
No, the break-even point is just one indicator. It is important to complement it with analyses of profitability, liquidity and solvency. Market research can also be beneficial.
