In business accounting, the break-even point refers to the amount of revenue necessary to cover the total fixed and variable expenses incurred by a company within a specified time period. On the other hand, the break-even point it’s also the point in time when revenue forecasts are exactly equal to the estimated total costs. Trade or investment companies, determine it by comparing the market price of an asset to the original cost; they reach the break-even point when the two prices are equal. This revenue could be stated in monetary terms, as the number of units sold or as hours of services provided. In corporate accounting, they calculate the break-even point by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit.
Understanding Break-even
It does not seem like much of a business goal. However, breaking even is an important point of reference for finance professionals. Firstly, because potential investors in a business not only want to know the return to expect on their investments. Additionally, they also want to know the point when they will realize this return. Secondly, a company or project’s break-even point gives a valuable benchmark that helps to develop long-term business plans. Its main purpose is to determine the minimum output to exceed for a business to make profit, and determine the earnings impact of a marketing activity. Therefore, it helps you determine pricing of products, debt servicing and other operational aspects of your business. In addition, identifying a break-even point helps provide a dynamic view of the relationships between sales, costs, and profits.
The break-even point is one of the most commonly concepts in financial analysis. However, is not only for economic use. It can also benefit entrepreneurs, accountants, financial planners, managers and even marketers. Break-even points can be useful to all avenues of a business. It allows employees to identify required outputs and work towards meeting these.
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