Understanding Breakeven Point: An Easy Calculation Guide

Breakeven point is an important measure in any business as it is the point when total revenue equals total costs hence no profit or loss is made. The critical role of this fiscal standard in strategic planning is that it helps firms to determine business-specific sales targets and effective pricing decisions. Knowledge of breakeven in company will be one of the basic knowledge that will guarantee that such an entrepreneur and manager comprehend at what volume of sales they will pay their expenses and enter the profit zone. This introductory example will take you through the fundamentals of breakeven analysis, including the fundamental formulas as well as their application in the real world in various industries.

Breaking even is one of the preliminary steps to sustainable growth, and contemporary technology could help to make this process much more efficient. Any business in the region can benefit from a powerful system such as Quickdice ERP, which automates financial tracking and reporting and can provide the appropriate data to arrive at an accurate calculation. Considering the recent regulations, it is not only convenient but also necessary to have a system that enables e-invoicing in Saudi Arabia. An advanced platform allows companies to have a better idea of their financial status, which makes it arguably the best accounting software in Saudi Arabia to help companies optimize operations and have a route to profitability.

What is the Breakeven Point?

A breakeven point is the production and sales level at which the total revenue of the company matches the total expenses. At this stage the business is not making any profit yet it is not making any losses either. After the business goes beyond the breakeven point, each and every sale goes directly to the profit of the business. Knowing your breakeven level in business gives you a clear financial benchmark, and you can then work on what to do to take you out of breaking even to actually making serious profits.

The Breakeven Point Formula: A Simple Breakdown

The essence of the breakeven analysis consists of two simple formulae where you can calculate the breakeven point in both units and sales dollars. These equations need an explicit interpretation of what your costs are, they can be split into two broad categories:

• The fixed cost: The level of production does not influence the fixed costs e.g. rent, salaries and insurance.
• Variable Costs: these costs are directly proportional to the production volume and are known as raw material, direct labor and packaging.

1. Breakeven Point Calculation in Units

This equation will show how many products you will need to sell to meet the expenses.
Breakeven Point (Units)=Selling Price per Unit−Variable Cost per UnitFixed Costs
The denominator, which is the Contribution Margin, is the revenue each of your units sold will contribute to your fixed costs.

2. Breakeven Point Calculation in Sales Dollars

This equation displays the amount of revenue that you have to earn to break even.
Breakeven Point, (Sales Dollars) = Contribution Margin RatioFixed Costs.

The proportion of the contribution margin divided by the selling price per unit expressed in a percentage form is the Contribution Margin Ratio. It tells us the proportion of every dollar of sales that is used to cover fixed costs.

Practical Example: Omar’s Riyadh Supply Shop

Let’s define the breakeven point formula by explaining it using the case of a Omar who owns a construction supply shop in Riyadh.

• Determinate Cost SAR 70000 (Rent, Salaries, Utilities)
• Variable Cost/cement bag: SAR 12.
• Selling Price per bag of Cement: SAR 20.

Step 1: Determine Contrib. Margin per Unit.

• Contribution Margin = SAR 20 SAR 12 = SAR 8 per bag.

Step 2: Find the Breakeven Point.

Let SAR 70,000 = SAR 8 = 7,500 bags = BP (Units).

Step 3: Determine The Breakeven Sales Dollars.

• Contribution Margin Ratio = SAR 8 / SAR 20 =0.40 (or 40 per cent.)
• Breakeven Point (Sales) = SAR 70,000/0.40=SAR 175,000.

According to this analysis, Omar has a clear goal; he has to sell 8,750 bags of cement or make SAR 175,000 in sale to meet all his monthly expenses. Any bag above this will make him SAR 8 of profit.

Applications of Breakeven Analysis in Business and Investment Decisions

Along with straightforward calculations, breakeven analysis is an effective tool to make strategic Investment Decisions and enhance the work of a business.
For Business Operations:

• Pricing Strategy: The breakeven point assists you in pricing in a way to not only break even, but also make a good profit margin.
• Cost Management: It is possible to strategically reduce the cost in the areas you identify as most significantly affecting the breakeven point.
• New Product Launch: Before introducing a new product breakeven analysis will allow you to decide whether the level of sales necessary to break even is achievable.

For Investment Decisions:

• Project Feasibility: Breakeven analysis is a tool used by investors to determine the time that a new venture or project will breakeven.
• Real Estate Investment: A real estate investor can utilize the breakeven point to identify when rental income will be used to meet all the expenses incurred in relation to a piece of property.
• Acquisition Analysis: A business acquisition provides an investor to know how long he/she will realize his/her initial investment through the breakeven point.

Benefits of Breakeven Analysis

The many advantages of a comprehensive breakeven analysis of any business are manifold.

• Exposes the Secret Biases: It compels you to categorize all your expenditures, which in many cases leads to the revelation of costs you might have neglected.
• Establishes Crystal-Clear Objectives: It sets an objective, quantifiable, data-rich sales target and is clear to everyone in the company.
• Removes Managerial Distrust: A breakeven analysis well documented will prove to investors that your business model is viable.
• Advises Strategic Pricing: You can also use it to understand how changes in price will impact your profitability so you can make better decisions.

Streamlining Financial Management with Quickdice

Manual calculations are a good base to understand what your breakeven point is, but in the modern age of business a more integrated approach is needed. This is where the upgraded Quickdice erp comes into the picture. Quickdice is not simply some accounting software, it is an entire platform, meant to help grow business.
Quickdice delivers an extensive package of functionality that automates and simplifies financial operations so that you can have the correct and up-to-date data to determine your breakeven point in business and other vital analyses.

• E-Invoicing in Saudi Arabia: As e-invoicing in Saudi Arabia becomes mandatory, Quickdice offers a hassle-free, ZATCA-compliant, solution, automating the generation and submission of invoices so your revenue data is never incorrect or out-of-date.
• Premier: Quickdice Push Financial VIews: Quickdice provides you with a real-time, transparent picture of your bottom line, top line and profitability, and allows you to keep track of your performance toward and beyond the breakeven point.
• Forecasting Data that can be accessed anywhere: Forecasting and scenario planning is easy with Quickdice because you can now consolidate your financial data easily and model different sales strategies along with how they affect your breakeven point.

Quickdice enables businesses in Saudi Arabia to not only determine their breakeven point, but also to engage in the management of costs, control pricing, and make data-driven decisions with the assurance of leading to profitability.

Conclusion:

The understanding of the breakeven point is the inalienable skill of any businessman or financier. It helps to have a crystal-clear goal: minimal level of activity which will prevent a loss. A thorough breakeven analysis can give businesses invaluable insights into their cost structure, better understanding of their pricing strategies, and enable them to make more confident Investment Decisions. This core financial indicator enables executives to stop thinking reactively and start thinking proactively and based on facts, and this way each sales endeavor will be effectively coordinated towards the aim of profitability. And all in all, understanding your breakeven point in business is step one to a strong and successful business.

Nowadays, technology is an essential element of improving your financial well-being and winning the race in a competitive environment. Although it is crucial to know the formula of the breakeven point, when using the sophisticated ERP solution, such as Quickdice, the whole procedure will be simplified. Quickdice offers on-the-fly access to your financial performance calculations, automatizing the computations, and letting you see the correct data you need to plan and monitor on a constant basis.

This combination of human intuition and great software makes sure that not only could business compute their breakeven point with just a touch of a button, but also bigely tailor their own processes to always perform better than the breakeven point so that they could continue to achieve success and growth.