Why the Breakeven Point is Important: The Beginner’s Guide!

In this article, I am going to tell you Why the Breakeven Point is Important? so if you want to know about it then keep reading this article. Because I am going to give you complete information about it, so let’s start.

Entrepreneurs can calculate their business’ breakeven point by increasing sales volume and lowering manufacturing or distribution expenses, or a combination of the two. An accurate estimate of this metric can be critical when working out the terms of the safe note when pitching to investors for raising funding.

A solid marketing strategy is absolutely essential to enhance sales volume. You’ll be able to determine your target market and then develop a marketing strategy that appeals to them.

Breakeven Point

Other ways to increase sales include:

  • Increase your customer base.
  • Increase the number of units sold.
  • Increase the average price per unit.
  • Increase the number of repeat customers.

If you’re looking to lower production or distribution costs, you may want to consider outsourcing part of your process (if possible) or investing in new equipment that will make production more efficient.

Other ways to decrease production or distribution costs include:

  • Use less expensive materials
  • Reduce the number of employees
  • Buy a cheaper manufacturing facility
  • Use more efficient machinery

Today’s article focuses on the same,i.e, “Why the Breakeven Point is Important”. The articles entail each bit of information necessary for you to know. 

Let’s get started!

Why the Breakeven Point is Important?

  • Budgeting and Goal Setting

Breakeven charts and calculations are essential in the budgeting process since the company knows precisely how many units must be sold to break even. Furthermore, the business owner is aware of the profits that can be generated at certain times, which can be depicted on a simple breakeven chart. This may assist companies in setting reasonable, attainable goals.

  • Pricing Strategy

The selling price is a significant factor in breakeven calculations. Managers can monitor the effect of changes in selling price on overall profitability if they have access to breakeven charts. The breakeven tool gives additional information for managers to make better price decisions while considering the supply side of the manufacturing process.

  • A Calculation to Prevent Loss

Breakeven analysis is often used to assess how many units a company must sell to avoid losses. This calculation requires the company to work out fixed expenses, variable expenses, and a selling price. Once these figures are known, it is relatively simple to work the breakeven threshold in terms of units or sales value.

  • An Instrument for Motivation

The breakeven calculation can also be used as a tool for motivating staff, particularly sales personnel since it demonstrates the profits that can be made at different times in the sales process. The figure makes it quite evident how much of an effect more sales would have on the overall profitability of the business. Bonuses may be tied to exceeding this point.

  • Make or Buy Decision

Companies must frequently choose between producing specific components themselves or buying them from a third party outside of the concern. The company may determine whether to purchase or produce based on the results of a break-even analysis.

  • Product Line Addition or Deletion 

If a product has outlived its utility in the marketplace, management must discontinue manufacturing and assess the impact on revenue and cost. Alternatively, management may choose to add a product to its current product line if it is expected to be a profit generator. The break-even analysis is useful in making such a choice.

Break Even Analysis Strengths

  • Helps entrepreneurs understand the degree of risk associated with a startup.
  • Calculations are quick and simple, making them ideal for providing quick estimations.
  • Helps entrepreneurs in understanding the feasibility of a business concept, as well as those who will finance or invest in the company.
  • Shows how important it is for a startup to maintain fixed expenses to a minimum. 
  • The margin of safety calculation determines how much a sales prediction can be overestimated before losses occur.
  • Entrepreneurs are focused on how long it will take for a startup to become profitable and achieve profitability – that is, how much production or total revenue is required.

Break Even Analysis Limitations

  • Because most businesses sell more than one product, working out how to calculate the breakeven point becomes more difficult.
  • Sales are unlikely to be the same as production – there may be some stockpiling or waste.
  • Break Even analysis should be seen as a planning tool. 
  • Variable costs may not always remain constant. For example, when production increases, the company may gain from being able to purchase inputs at reduced costs (purchasing power), lowering variable costs per unit.
  • Unrealistic assumptions – items do not sell at the same price at varying production levels; fixed costs change as output varies.

Conclusion:)

Knowing how to calculate the breakeven point is important because it helps you determine whether your business can continue to operate. If you have no sales, there will be no revenue to cover your fixed costs, so you need to either reduce those costs or increase your sales so that they cover them. 

If you find yourself stuck with a high fixed cost but low sales volume, consider lowering your overheads or increasing your sales volume by following the tips in this article.

Alejandro Cremades

About the Author: Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star, Barbara Corcoran and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs. 

Most recently, Alejandro built and exited CoFoundersLab, which is one of the largest communities of founders online. 

Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding, where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake). 

Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business. 

Alejandro has been involved with the JOBS Act since its inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.

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