Break-even point: the arithmetic of the modern economy
The concept of profitability threshold
One of the most important indicators of the financial results of any modern economic system is the break-even point, also called the threshold of profitability. It is known that the fundamental principle of the activities of a commercial organization, enterprise or company is to obtain as much profit as possible. Only under this condition can we achieve a stable existence of the business and ensure the prospects for its development. It is the level of profit, which manifests itself in the form of dividends on invested funds, that determines the possibility of involving new investments in the company's financial turnover and, consequently, increasing its own capital. The whole concept of profitability in modern economic theory is based on this. It is the break-even point that is the determining factor for the financial success of an enterprise.The lower this indicator, the more attractive the company is to investors.
Economic theory says that the break-even is not only the normal state of any commercial organization, but also a necessary condition for its survival in the modern realities of cruel competitive confrontation. This is the reason for the burning and sustained interest of many economic theorists in the problems of profitability. For the optimal operation mode of the company, it is necessary to maximize its profit level. This is the axiom of modern economics. To achieve a similar state of the economic system, it is necessary to conduct a constant analysis of such a critical threshold as the break-even point. This fateful indicator also allows you to determine how the change in the volume of production, sales of products and their prices, as well as the main characteristics of costs, affect the financial situation of an enterprise.
No wonder the threshold of profitability is called a critical point - this is the line on the other side of which the very existence of the company may be at risk.Successful business involves the exact calculation of the required volume of production, which is required to implement to cover all the costs and costs of its production. Accordingly, if the volume and sales are below the critical level, the company becomes unprofitable, which would entail a lot of negative consequences, up to the company's bankruptcy. And vice versa, the more the production volume exceeds the calculated critical point, the more stable and prosperous the enterprise will be. In addition, in this case, the firm will become much more stable, even with the likely reduction in markets. The break-even point is the line beyond which the enterprise has no future. Therefore, an exact calculation of break-even is extremely important.
Break-even calculation: graphical method
The break-even point can be determined both graphically and analytically. The first of them provides for the construction of a graph, on the horizontal axis of which the volume of production is deposited, and on the vertical axis - production costs and expenses. Moreover, separately marked constant values and variables.As a result of such a construction, several independent graphs are formed on the coordinate grid: fixed costs, variable and gross costs, production volume, and revenue from its implementation. At the intersection of graphs that display revenue and gross costs, and there will be a break-even point.
The break-even point can be calculated both in units of output and in money equivalent, or taking into account the expected level of profit. For each method has its own calculation formula. For example, the classical break-even point formula in financial terms is as follows:
LDP = (B x Zpost) / (B - Iper), where:
LDP - directly the break-even point itself;
B - revenue;
Trest - costs of a permanent nature;
Iper - variable costs.
There are certain factors of mutual influence and the relationship between costs, production and profit. It is known that, under equal conditions, the growth rate of profits almost always outpaces that for the sale of products.