Surely we have already heard about Profitability threshold and deadlock of companies or businesses But what is the breakeven or deadlock? What is it based on? Is it really important for a company? How can it be calculated? What is it for? At what point should I do it? Throughout this article we will explain step by step the importance of this calculation, how easy it is and the benefits it brings to companies or businesses.
All in an understandable way and without so much entanglement so that it is easy to understand and perform, especially for people who are just starting or intending to start a company or business.
So without further ado let's start understand this widely used term and calculation and beneficial for companies.
In most companies, regardless of whether they are small or medium-sized, a price is determined that is through the calculation of products in stock and to be sold, with this, the expenses that were made are paid, that is, what was previously invested this is what is called deadlock or breakeven; In other words, it is the amount of sales that were made and that in this way there was neither loss nor profit, that is, what was already invested was simply recovered.
The deadlock or breakeven point It is then the sum of what you entered or the percentage of sales that equals the amount of fixed value; Above that amount these incoming income will cover the fixed value and the rest will grant benefits that in the same way if they are below it will result in losses of the invested.
WHAT DOES THE PROFITABILITY THRESHOLD OR DEAD POINT MEAN?
This term so widely used in economics the threshold of profitability, neutral or breakeven point It is derived from its acronym in English BEP (break Even Point) and is in simple words it is the minimum quantity of units sold in our company to conclude in the profit of zero. In other words, it is when the total amount spent is identical to the total income from what is sold.
With this minimum income of the sales and production minimum it will become a profitable product for the business, as long as everything produced is sold; since if there is production but no sale, obviously there will be no income for the business or company; In other words, there will only be a storage cost.
To classify a profitable or not profitable company, the number of products it sells must be analyzed and whether all of them help to provide a good through the diversity of the product portfolio produced. On the other hand, if the case of the company is the elaboration of only one article or product, it is concluded that it has reached the break-even point or deadlock.
In other words to better understand; the profitability threshold or dead end is the quantity of products or services that we must sell to be able to pay all our fixed or variable expenses that we invest to make this product to sell. Explained in another way, it is that limit in which we begin to recover what was invested in the business and we begin to generate money with our products.
WHAT ARE YOUR ADVANTAGES OR BENEFITS?
One of the Advantages of the break-even point or deadlock is to give reports to the company about or business about the dangers or risks that is had in the variation of quantity of production; In addition, it helps to give a broader and clearer picture of the effects that occur in the increase in the fixed value; In addition, it helps us decide the changes that will be made for greater benefits, such as an increase in price or cost in the manufactured products.
LIMITS OF THE PROFITABILITY THRESHOLD OR DEAD POINT:
- The realization of sales does not go hand in hand, so when one suffers from each other, this will affect the level of what already exists.
- The quantity of the items sold will always depend on the sale price.
- The variable value can suffer an increase or decrease, so they must be classified depending on the planned time.
- If the quantity of production is greater, the costs will not remain constant and will increase.
HOW DO I CALCULATE THE PROFIT / DEAD POINT THRESHOLD?
To calculate the deadlock or profitability threshold, only 3 points are needed about our company:
1. The total value of our company or business.
2. The prices of the items for sale.
3. The variable value of each unit already sold.
The total value of our company or business.
El fixed price or value is that of everything that will be invested or paid so it is needed for the preparation of the products that you will sell, such as the rent of the property, payments to employees, electricity, telephone, insurance, transport, gasoline for transport, etc. It is important to take into account each and every one of them in order to estimate the fixed value properly.
The prices of the items for sale.
Another variable value or price is the sale price that if you only sell a single product it is easy because you will only have to establish one. But usually different prices are handled per item or product, which is called the average sale price; but on the other hand, if your company is already large and established and has several products and presentations of these, then we speak of a break even or deadlock and the calculation must be made for each of these lines of business.
The variable value of each unit already sold.
The last point we need is the variable value of each unit or average variable cost here enters everything that is spent in the business, raw material to make the product or products that are manufactured and depending on the quantity that is manufactured of these, it is for This is classified as a variable cost since it will depend on the quantity that will be made, that is, if we manufacture a lot, the quantity will be greater, but if we manufacture little, the quantity will be less, whether production is lowered or increased; the result of all this calculation will be the third point three. It is important to remember that this calculation will be done excluding electricity, salaries, insurance, rent of place and everything already noted in the first point that we classify as a fixed expense.
Contribution margin
To obtain the contribution margin we must do the following calculation:
Subtract the price of the item for sale, minus, the variable value of each unit.
Calculation of the profitability threshold or dead center.
To make the calculation of the profitability threshold or dead center we have to make a division, the total value between the unit contribution margin which was explained above; namely:
Dividing the total value by the unit contribution margin will result in the threshold of profitability.
This will be the point from which you will begin to make a profit.
This result will be the profitability threshold or deadlock that we must do each month, year or day, (as is more comfortable or appropriate for the company) in order to start with the profits or benefits because we will know for sure the total value as well as the variable value of each unit sold, which will give us more control and organization to have greater benefits .
This calculation is one of the most important to perform; So if you have in mind to establish a business or company, it will be very important to do so, in this way you will be able to set points of sale to be able to achieve this profitability threshold as soon as possible and it will be one of the most important for you to establish in the viability plan that you must present to a bank.
The formula with which the above explained is carried out is the following:
Qc = CF / (PVu - Cvu)
SYMBOLIGY
Qc = Profitability threshold or deadlock, which is the number of units made and sold to result in zero profit.
CF = fixed cost or total value.
PVu = Unit sale price.
CVT = Total variable costs.
CVu = Unit variable costs.
B ° = Benefits.
I = Income.
C = Total costs.
In an easy way and in clear language we have explained what is the Break-even point and deadlock for companies or businesses and their profits. So it is only a matter of organizing, planning and forecasting all the expenses that are made in the company or business, and keeping a record of them in order to be able to calculate it daily, weekly, monthly or annually according to the needs (although it is advisable do it monthly).
We hope this article has been to your liking and helps.