In business, not the business would also have interest right from the first day of operations. But important questions that all businesses need to answer is: When is enough revenue to offset the cost and start profitable? The answer lies in analysis of the breakeven point – a financial instrument important to help businesses determine the minimum turnover to be achieved to avoid losses.
Understanding the breakeven point not only help business financial control, but also to support strategic decisions about price, production, costs and expand business. In particular, in the context of market competition is fierce, with the cost increasing day by day, businesses need modern approach than to analyze and optimize the breakeven point.
So how to accurately calculate the breakeven point? Business should avoid these mistakes when applying this tool in practice? And how to take advantage of AI technologies in financial analysis to optimize profit? Let's Lac Viet Computing learn all in the article below.
1. The breakeven point is what?
1.1. Definition point
The breakeven point (Break-even Point – BEP) is the level of sales or production at which the business does not suffer losses, but also have no interest. This is one of the financial indicators important to help businesses determine the minimum required gain to maintain operations.
When businesses operate below the level of the breakeven point, which means total expenses are greater than revenue, business losses. Conversely, when sales surpassed the break-even point, the business began to take interest.
For example, If a company produces phones that total fixed cost is 1 billion/month, variable costs on each product is 3 million and the selling price per product is 5 million, then the company must sell at least 500 products per month to reach the breakeven point.
1.2. Why enterprises need to analyze the breakeven point?
Analysis of the breakeven point plays an important role in the financial management business:
- Determine the minimum sales needed to achieve to not be the hole.
- Financial planning and strategic selling price.
- Decision support business expansion or optimize cost.
- Control risks, ensure the viability of the business in the long term.
A business does not understand the breakeven point can bring out the decided price mistakes, leading to low profit or losses last long.
1.3. The factors that affect the breakeven point
The breakeven point is affected by financial factors, and activities such as:
- Fixed costs (Fixed Costs): Costs that do not vary according to production volume, such as rent, workshops, management staff salaries, the cost of machinery maintenance.
- Variable costs (Variable Costs): costs vary according to the number of products produced, like raw materials cost, direct labor shipping costs.
- Product sale price (Selling Price per Unit): The price that the business set out directly affect the time to reach the breakeven point.
- Output sales (Sales Volume): the Amount of product sold decide to speed business reach the level of breakeven.
If the business can reduce fixed costs or variable costs, or increase the reasonable price which does not affect sales, then the breakeven point will be lowered, help enterprises to quickly achieve profitability.
2. Formula for calculating the breakeven point
2.1. The basic formula calculate the breakeven point
The breakeven point can be calculated according to the number of products, or according to the level of revenue that the business needs to achieve to not be the hole. Formula for calculating the breakeven point as follows:
- Point according to the number of products (Break-even Quantity – BEQ):
The breakeven point (products) = Total fixed costs / (selling Price – variable Costs per unit of product)
- The breakeven point in revenues (Break-even Revenue – BER):
The breakeven point (sales) = Total fixed costs / gross profit margin on sales
In which:
- Total fixed costs (Fixed Costs): Costs that do not vary whether business of producing many products, such as office rent, staff salaries management, asset depreciation.
- Variable cost per unit (Variable Costs per Unit): direct Costs related to product manufacturing or service delivery, as the raw material, direct labor, shipping.
- Selling price (Selling Price per Unit): the amount Of money obtained from each unit of product sold.
- Rate of gross profit on sales (Contribution Margin Ratio): Is calculated by the formula:
Gross profit margin = (selling Price – variable Costs) / selling Price
2.2. Illustrative examples on how to calculate the breakeven point
Example 1: Calculate the breakeven point in number of products
A business phone manufacturers have:
- Fixed cost: 1 billion/month
- Selling price per product: 5 million
- Variable costs per product: 3 million
Apply the formula:
The breakeven point (products) = 1 billion / (5 million – 3 million) = 500 products
This means that business must sell a minimum of 500 products each month to not suffer losses. If you sell less, the business will not be enough revenue to offset fixed costs.
Example 2: Calculate the breakeven point in revenue
A company, software service:
- Fixed cost: 500 million vnd/month
- Sale price software: 10 million/package
- Variable costs per package: 3 million
Calculate gross profit margin:
Gross profit margin = (10 million – 3 million) / 10 million = 0,7
The breakeven point (sales) = 500 million / 0,7 = 714 million
Ie business needs revenue for at least 714 million per month to not be the hole.
3. Analysis of the breakeven point according to the model of costs and revenues
3.1 Model point linear (Linear Break-even Model)
This model assumes that:
- Sale price does not change according to the number of products sold.
- Fixed costs do not change in the given time period.
- Variable cost per unit is fixed.
This model is fit with the business whose products or services, stable, with little change in the scale of production.
3.2 Model point multi-product (Multi-product Break-even Analysis)
In fact, many business many products with low cost and sell price different. Then, to calculate the breakeven point, businesses need to determine the proportion of the revenue of each product in total sales.
Formula for calculating the breakeven point multi-product:
The break-even point = Total fixed costs / [(contribution Rate product A × A revenue) + (contribution Rate product B × revenue B) + ...]
For example, A business, business two products:
- Product A has A sales price of 5 million, variable costs 3 million (the ratio of contribution: 40%).
- Product B selling price 10 million, variable costs 6 million (the ratio of contribution: 50%).
- Total fixed cost: 1 billion.
The break-even point = 1 billion / [(0,4 × 40%) + (0,5 × 60%)] = Number of products to be sold to reach break-even.
This model helps businesses determine the contribution of each product line in gross profit, from which adjust the trading strategy accordingly.
3.3 Model point non-linear (Non-linear Break-even Model)
This model applies to businesses that have variable costs change according to the scale of production, as the manufacturing industry or commerce. When the scale of production increases, variable costs per unit may be reduced due to the advantage of economies of scale.
For example:
- When produced under 1,000 products/month, variable costs are $ 3 million/product.
- When production on 1,000 products/month, variable costs decreased to 2.7 million/products that the business purchase of raw materials, large quantity with lower price.
This model is consistent with business production, big business has plans to expand the scale or the industry, there is huge variation in cost.
4. Application analysis the break-even point in business
Analysis of the breakeven point is not just a financial tool to help businesses determine the minimum turnover to be achieved in order to not suffer losses, but also plays an important role in the strategic decisions. When applied properly, it helps business optimal selling price, scaling, logical and control of financial risks more effectively.
4.1. Determine the minimum price to guarantee a profit
One of the most important applications of break-even analysis is to help the business determine the minimum selling price need to book to guarantee a profit. If the business is pricing the product too low, the revenue may not be enough to cover fixed costs, leading to losses. Conversely, if the price is too high, customers can leave and go to competitors.
The formula helps businesses determine the minimum selling price based on the breakeven point:
The minimum selling price = (fixed Costs + variable Costs) / Number of products is expected to sell
For example:
A business, production of bottled water has a total fixed cost every month is 500 million, the variable cost per bottle is $ 2,000. Business expected to sell 100,000 bottles per month. Then:
The minimum selling price = (500 million + 100.000 × 2.000) / 100.000 = 7.000 vnd/bottle
This means that if the business selling bottled water bottom prices 7.000 vnd/bottle, they will not be able to reach the breakeven point.
The influence of strategy discount, promotion to the breakeven point
The program discounts, promotions are often used to stimulate consumption, but if not carefully calculated, they can cause the business to fall into a state of loss.
For example:
- If the business sale discount 10%, they should calculate the amount of products sold be enough to offset the revenue lost due to discounts do not.
- If the cost of production does not change, but the selling price decreased, the breakeven point will increase, which means that businesses have to sell more to offset fixed costs.
Formula for calculating the number of products to be sold when the price reduction:
Output air new capital = Total fixed costs / (Price – variable Costs per unit)
This helps business decision whether to apply the program that promotion or not, and if there is need, how many products to ensure still achieve desired profit.
4.2. Orientation business strategy and scale
Businesses often expand production or enter new markets when they believe that the revenue can pass the breakeven point.
Break-even analysis help businesses answer the important questions such as:
- When the output current large enough to expand the plant, or buy more equipment?
- Whether the extension can help reduce variable costs per product and enhance profitability not?
- The market has enough potential to ensure revenue pass the level of new capital after the extension not?
For example:
A manufacturing enterprise candies are sold 10.000 box cake per month and the revenue breakeven. When businesses want to double yields of up to 20,000 boxes, fixed costs also increased (due to hire more staff, buy more machinery). Businesses need to calculate whether the revenue expectations from the market are enough to offset the fixed costs new.
Application analysis of the breakeven point to calculate the increase in cost when production expansion
The expansion of production scale, usually pulled by an increase in fixed costs (for example, the rental cost, investment in new production line). To ensure the decision to expand is reasonable, businesses need to forecast the increase in revenue compared to the increase in fixed costs.
Formula to calculate the new revenue to be achieved when scaling:
The minimum revenue after expansion = (new fixed Costs + variable Costs new) / gross profit margin
For example:
A business, production of furniture are revenue of 10 billion/year, with fixed cost 3 billion and gross profit margin of 40%. If the business wants to expand production with fixed costs increased by 5 billion/year, the minimum revenue needed to achieve to not be the hole is:
The minimum revenue after expansion = (5 billion + variable Costs) / 40%
If the business is not sure that the increase in revenue after expansion can exceed this number, then decided to expand can be too risky.
4.3. Determine the point holes (Break-even Risk) to avoid financial risks
Break-even analysis helps to determine the level of revenue should reach to non-hole support companies to assess the financial risks.
One of the greatest risks for businesses is the breakeven point is too high, make business easily affected if market volatility or declining revenue.
Formula for calculating the minimum turnover to avoid heavy losses in the case of sales decline:
The minimum revenue to maintain operations = fixed Costs / (Rate of gross profit – Margin market risk)
For example:
If a business has a fixed cost is 2 billion/year, gross profit margin of 50%, but the market can drop in sales of 10%, the minimum turnover to avoid risk is:
The minimum revenue = 2 billion / (50% – 10%) = 5 billion
This helps businesses prepare a backup plan when the markets fluctuate unexpectedly.
Applications in financial forecasting, budget planning and cash flow management
Analysis of the breakeven point also supports businesses in the financial forecast and budget planning by:
- Predict the revenue to be achieved under each scenario different business.
- Construction cost plan and cash flow in accordance with the financial situation real.
- Evaluate profitability while expanding product portfolio or test new business models.
5. Common mistakes in analysis of the breakeven point and how to fix
Break-even analysis is an important tool to help businesses make financial decisions and business strategy. However, many businesses suffer from these common mistake when calculating or apply the breakeven point in fact, lead to the financial decision is not correct. Here are three common mistakes and how to fix to help businesses manage finances more effectively.
5.1. Just focus on fixed costs that ignore market factors
Some businesses only focus on reducing fixed costs, which do not assess the influence of market and customer needs. They cut costs, rigid, such as reduction of personnel, the office rent cheaper or reduce budget marketing, which does not assess whether these changes can negatively affect the revenue or not.
How to fix
- Analyze the market before the cut fixed costs: Businesses need to perform research on customer behavior, market trends and customer feedback before you decide to reduce any fixed charges whatsoever.
- Optimal concentration instead of just cut: Instead of cutting budgets, marketing, business can move on to the methods of digital marketing to reach customers with lower cost but more effective.
- Combined analysis of competitors: Determine whether the business in the same industry have fixed costs and how material can maintain competitive advantage when adjustment costs are not.
5.2. Do not consider factors change of variable costs
Many businesses assume that variable costs are always fixed on each unit of product, when in fact, this cost may change according to the scale of production and market. When the scale of production increases, businesses can take advantage of economies of scale to reduce the cost per unit of product. Conversely, if the scale decreases, variable costs can increase due to not achieve the level of discount from the supplier.
For example: A business production food import raw material in bulk to get better prices. When production fell due to the market demand is low, businesses have to import raw materials, with orders more, causing the price of raw materials per unit of increase higher than originally expected. If the business doesn't update the data in the analysis of the breakeven point, they can take out sale price do not match.
How to fix
- Use dynamic analysis (Dynamic Break-even Analysis): Instead of using a level of variable costs fixed, businesses should analyze variable costs according to each level of output differences to determine the influence of the scale of production to the cost.
- Build script different cost: simulate the different situations when the price of raw materials increases, labor productivity changes or fluctuations in the supply chain.
- Leverage technology and AI to track expenses: Use the system analyze financial data to track variable costs in real time, and adjust the breakeven point in time.
5.3. Non-redundant elements of uncertainty in business
Analysis of the breakeven point is often made based on the assumption that the market and the cost does not change, when in fact, businesses can face more volatility as:
- The price of raw materials increases due to inflation or fracture of the supply chain.
- The interest on the loan changes, increases financial costs.
- Change tax policy, or regulatory laws affecting the cost of operation.
- The appearance of new competitors, causing revenue decreased in comparison with the original plan.
For example: A business automobile manufacturing planning breakeven based on the assumption that steel prices will remain stable. However, due to the crisis, supply chain, steel prices increased by 20%, making the cost of production increases sharply, causing the break-even point will also increase. If businesses do not have a backup plan, they may face financial risks serious.
How to fix
- Building financial scenario different: Instead of just calculating the breakeven point under one condition single business enterprise should set up different scenarios based on fluctuations in the market, including the script best, average and worst.
- Application AI to financial forecasting: tools such as Finance AI Agent can analyze historical data, trends, costs and forecast market movements, to help business owners adjust your financial plan.
- Establishment plan for cost and revenue: Enterprises should have a financial reserve fund or the alternatives to reduce the impact of fluctuations in surprise.
For example, A retail business can sign long-term contracts with suppliers to keep prices stable, avoid being affected by fluctuations in market prices. In addition, businesses can use the financial model forecasts to predict the impact of fluctuations in raw material prices up point in the next 6-12 months.
6. Finance AI Agent of Lac – support tool business break-even point analysis more accurate
In the digital age, the app artificial intelligence (AI) in financial analysis to help businesses improve efficiency, manage and optimize business strategy. Finance AI Agent of Vietnam is a smart solution to help businesses automate the process of analysis of the breakeven point, providing financial forecasts accurate, and proposed strategies to optimize costs.
Finance AI Agent to help businesses automatically analyze the breakeven point how?
Collect financial data from the accounting system and ERP
One of the biggest challenges when analyzing the breakeven point is the collection and processing financial data from various sources. Finance AI Agent can directly integrated with the accounting software and ERP system, to help automate the process of synthetic data, including:
- Fixed costs: office rent, staff costs, depreciation of assets.
- Variable costs: the Price of raw materials, production costs, operating costs.
- Revenue: sales Data according to each product, region, sales channel.
Instead of business to enter data manually, AI will automatically update data in real time, ensure accuracy, eliminating the risk of errors due to input by hand.
Automatically calculate the break-even point under each scenario financial
Different calculation methods traditionally Finance AI Agent can build many financial scenario different to help businesses assess the degree of influence of each variable to the breakeven point.
For example, if the business wants to test model price, ONE can calculate the breakeven point changes like when:
- Selling prices increased or decreased by 5%, 10%, 15%.
- The cost of raw materials increases due to market fluctuations.
- Business of a seasonal increase or decrease due to economic recession.
Thanks to the ability to simulate and forecast this business can business decisions based on real data, instead of only relying on conjecture.
Enterprise alerts when cost or revenue have unusual fluctuations
One of the biggest risks in the analysis of the breakeven point is the sudden change of the cost or revenue that the business doesn't react. Finance AI Agent provides system alerts, auto business help early detection of problems such as:
- Production costs increased abnormal due to raw material scarcity.
- Revenue decreased suddenly due to market fluctuations or competitors launching new products.
- Operating costs exceeded the budget, the risk increases the breakeven point.
For example, If the cost of raw materials increased by 20%, WHO will immediately calculate the impact of this change to the breakeven point, then take out the proposed adjustments to the sale price or optimal production processes to maintain profitability.
Application AI to forecast the breakeven point and the optimal financial
Application WHO analyze market trends, forecasts fluctuations in cost
One of the important features of Finance AI Agent is the ability to forecast trends in the cost and revenue in the future based on historical data, and market conditions.
- The forecast cost of raw materials: WHO analyze data from the various supplies to predict the price of raw materials in 6-12 months to help business financial planning more accurate.
- Revenue forecast seasonal: AI monitoring revenue model in the past to predict the stage of high points and low points, to help businesses adjust sales strategy accordingly.
- Analysis of the impact of inflation and exchange rates: If the business is to import raw materials or export products, AI will predict the influence of exchange rate and inflation to the cost of production and revenue.
Hints, strategies, optimize costs, increase revenues
Besides, data analysis, Finance AI Agent also propose solutions to help businesses optimize the breakeven point, including:
- Reduce fixed costs: AI analyzes in detail each category of cost, determine what expenses are not effective can be cut without affecting business operations.
- Optimized price: WHO proposed selling price reasonable to reach the breakeven point faster, while maintaining competitive advantage in the market.
- Adjust product strategy: If the business has many product lines, WHO will calculate whether products have a high profit margin and proposed to focus resources on that product in order to reach the breakeven point faster.
Analysis of the breakeven point as a guideline to help businesses optimize business operations, pricing, products, accuracy and control costs effectively. A successful business not only understand clearly the minimum turnover to be achieved but also know how to adjust the strategy to quickly pass the breakeven point and increase profits.
In a volatile market, any business better control the breakeven point will have competitive advantage, more firmly. Don't let revenue only just enough to offset the cost – make use of the analysis of the breakeven point as a leverage strategy to profitable growth sustainable.
