Break Even Point

Break Even Point

When you started doing business one of the things you would have considered is Break Even Point. You would want to know when you could take back the invested money in order to make more money. Break Even Point in Cost Accounting meaning a stage where you will reach a point of Zero. It means the point where you Total cost curve and Total Return curve meets. Total Cost is Total Fixed Cost and Total Variable Cost taken together.

The formula is  B.E.P = Fixed Cost/Contribution per unit. Contribution is (Revenue – Costs) per unit.

When you have requested a bank for a loan they would have asked for a forecast. In that forecast they would want to know when your business would break-even. A very common definition of Break-Even is: “The level of sales necessary to cover all variable and fixed expenses and neither make a profit or a loss”.But I believe the definition of Break Even Point (B.E.P should be “The level of sales necessary to cover all variable and fixed expenses plus an amount of Profit.  What is the use of reaching Break Even Point if you are not making profit? You are not running a charity. So please make sure to add a certain amount that is required. This amount will justify the time and effort that you have put in.

How will you come to know if a company is making profit or not?

First things first – How will you come to know if a company is making profit or not? Or before that – Why should we know if your business is making profit or not? Well friends one of the prime objectives of starting any business is to make profit. If you are not sure or if you don’t know whether you are making profit or not, I think you have defeated the purpose of starting that business. If your intention is not to make profit are you running a charity?

Profit

Anyway coming back to the topic, How will we come to know if the company is making profit or not? If company says we have got high-profile clients, does it necessarily mean that the company is making profit? If a company says we have got an outstanding brand, does it necessarily mean that the company is making profit? What if you find out that the company has got motivated employees? The walk in together, they walk out together. They take lunch breaks together. They eat together. They even kill themselves together. Well what I mean is they go out for smoke breaks together. Does it necessarily mean that the company is making profit? What if the company directors are millionaires? Does it tell, whether company is making profit or not? How about the company that operates in prime location? Does it necessarily mean that the company is making profit?

Friends, none of these can be used as a yard stick to know if a company is making profit or not. Only way or the most effective way to know that a company is making profit or not is by simply preparing basic financial statements and reading and understanding it.

Basic Financial Statements

There are three basic financial statements that will tell us whether a company is making profit or not. They are:

  1. Balance Sheet
  2. Profit & Loss Statement
  3. Cash-Flow Statement
  • These three statements will tell us whether a company is making money or not.
  • It will also tell us where and how a business is making money.
  • It is a legal requirement to prepare Profit & Loss Statement and Balance Sheet at least once every year.