Sridhar has a master’s degree in science. Blogs at
http://wilybusiness.blogspot.com
http://bnsridhar.blogspot.com
The point at which a business reaches no loss no profit is called the break even point. It is the volume of sales to be achieved by the company, so that the profit obtained covers all the expenses incurred by the company.
This volume of sales could be high or low. It depends on the margin of profit.The financiers and investors are generally very keen that this breakeven point is achieved as quickly as possible.
It may not too simple to calculate the breakeven point. The companies may have different products having different margins of profit. They may have to cut down the overhead cost. As they will be facing stiff competition in the market, it is not possible to increase the profit margin beyond a certain level.
Companies generally try to keep the breakeven point as low as possible and achieve it as fast as they can. A company will be under loss before it reaches this point.
Your breakeven point may keep changing as your margin of profit and costs change. You have to constantly monitor your profit margins as well as your input and overhead costs. The break even point has to be recalculated constantly.
To put it very simply, let us say that you setup a shoe manufacturing unit, and plan to manufacture 10000 shoes per month. The average profit per unit on a pair shoes is $10. But it might take about one year to achieve the production of 10000 shoes per month target. It your monthly expenses under all heads is $20000. As your production reaches 2000 shoes per month you will be making a profit of $20000. This is your breakeven point.
If you take three months to achieve the target of production of 2000 shoes per month, till you arrive at this point your company will be under loss. Many businesses fold up due to the lack of knowledge of breakeven point
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