Break even (break-even point) is the minimum volume of production and sale of goods (work, services), at which costs will be offset by income, and with the production and sale of each subsequent unit of production, the organization begins to make a profit. The break-even point can be determined in units of production, in monetary terms, or taking into account the expected profit margin.
The economic meaning of the break-even point The break-even point is the critical production volume. When the break-even point is reached, the profit and loss of the organization are zero. The break-even point is an important value in determining the financial position of an enterprise. The excess of production and sales volumes above the break-even point determines the financial stability of the enterprise.
The break-even model is based on a number of initial assumptions:
- the behavior of costs and revenues can be described by a linear function of one variable - output volume;
- variable costs and prices remain unchanged throughout the entire planning period;
- the product structure does not change during the planned period;
- the behavior of fixed and variable costs can be accurately measured;
- at the end of the analyzed period, the enterprise has no stocks of finished products left (or they are insignificant), i.e., the sales volume corresponds to the production volume.
Using the algebraic method, the point of zero profit ( break-even point formula) is calculated based on the following relationship:
I = S - V - F = (p * Q) - (v * Q) - F = 0
Where,
I is the amount of profit;
S - revenue;
V - total variable costs;
F - total fixed costs;
Q - production volume in physical terms;
v - variable costs per unit of production;
p - unit price (sales price).
From here we find the critical volume (break-even point in physical terms):
Q" = F / (p-v)
where Q" is the break-even point (critical volume) in physical terms.
The break-even point (the critical volume of production and sales of products or the profitability threshold) can be calculated not only in physical terms, but also in value terms:
Q" = Q" * p
Q” = F / [(p-v) / p]
Q” = (F*S) / (S-V)where Q” is the break-even point in value terms (the critical volume of production and sales of products).
The economic meaning of this indicator is revenue at which profit is zero. If the actual revenue of the enterprise is greater than the critical value, it makes a profit, otherwise - a loss.
The above formulas for calculating the critical volume of production and sales in physical and value terms are valid only when only one type of product is produced or when the output structure is fixed, i.e. the proportions between different types of products remain unchanged.
If several types of goods are produced with different marginal costs, then it is necessary to take into account the structure of production (sales) of these goods, as well as the share of fixed costs attributable to a specific type of product. The closure point of an enterprise is the volume of output at which it becomes economically ineffective, i.e. at which revenue is equal to fixed costs:
Qз = F/p
where Qз is the closing point.
If the actual volume of production and sales of products is less than Q", the enterprise does not justify its existence and should be closed. If the actual volume of production and sales of products is greater than Q", it should continue its activities, even if it receives a loss.
Another analytical indicator intended for risk assessment is the “safety edge”, i.e. the difference between the actual and critical volumes of production and sales (in physical terms):
Kb = Of - Q"
where Kb is the safety edge; Of - the actual volume of production and sales of products.
K = Kb / Qf * 100%
where K is the ratio of the safety edge to the actual volume.
The safety margin characterizes the risk of the enterprise: the smaller it is, the greater the risk that the actual volume of production and sales of products will not reach the critical level Q" and the enterprise will be in the loss zone.
Data on the value of marginal income and other derived indicators have become quite widespread for forecasting costs, sales prices of products, acceptable increases in the cost of production, assessing the effectiveness and feasibility of increasing production volume, in solving problems such as “make it yourself or buy it” and in other optimization calculations management decisions.
This is largely due to the comparative simplicity, clarity and accessibility of break-even point calculations. However, it must be borne in mind that the break-even model formulas are only suitable for those decisions that are made within an acceptable range of prices, costs and production and sales volumes. Outside this range, unit selling price and unit variable costs are no longer assumed to be constant, and any results obtained without such limitations may lead to incorrect conclusions.
Along with its undoubted advantages, the break-even model has certain disadvantages, which are associated, first of all, with the assumptions underlying it. When calculating the break-even point, they proceed from the principle of a linear increase in production and sales volumes without taking into account the possibility of a jump, for example, due to the seasonality of production and sales.
When determining the conditions for achieving break-even and constructing the corresponding schedules, it is important to correctly set data on the degree of utilization of production capacity.
Analysis of the break-even point is one of the important ways to solve many management problems, since when combined with other methods of analysis, its accuracy is quite sufficient to justify management decisions in real life.
Determining the break-even point is the cornerstone of the effective functioning of any enterprise. The calculation of this indicator is of paramount importance not only for the owners of the enterprise, but also for its investors. If the former must understand when production becomes profitable, then the latter must be aware of the value of this indicator in order to make an informed decision about providing financing.
What is the break-even point and what does it show?
This indicator helps to understand when a company stops incurring losses, but is not yet able to earn a profit. At the same time, the production and sale of any additional unit of production entails the formation of profit. Thus, the break-even point is a certain starting point from which the enterprise can begin to develop effectively. Those. this indicator is a kind of indicator that the company is moving on the right path.
This indicator is also called profitability threshold or simply BEP(from English break-evenpoint). It characterizes the volume of production of a product at which the proceeds from its sale will be equal to the costs of its production.
What is the economic meaning of determining the value of this indicator? The profitability threshold indicates the enterprise's ability to recoup its costs.
The break-even point occurs when expenses are covered by income. The company records profit when this indicator is exceeded. If this indicator is not achieved, then the company suffers losses.
So, the break-even point shows:
- the level above which the company begins to record profits;
- the minimum acceptable level of revenue, if below which the production of products ceases to pay off;
- the minimum acceptable level of pricing, below which one cannot fall.
In addition, the determination of this indicator allows:
- identify problems that are associated with changes in the break-even point over time;
- identify how it should be possible to change the volume of output of a product or its production when the price varies;
- calculate how much it is advisable to reduce revenue so as not to incur losses.
Determining the profitability threshold helps investors determine whether a given project is worth financing if it breaks even for a given sales volume.
Video - break-even point analysis:
Thus, most management decisions are made only after the break-even point has been calculated. This indicator helps in calculating the critical value of sales volume at which the company's costs become equal to revenue from sales of goods. Even a slight decrease in this indicator will indicate the beginning of bankruptcy of the company.
Important! When the company crosses the break-even point, it will begin to record profits. Until then, it operates at a loss.
Calculation formulas
The profitability threshold can be measured in physical or monetary terms.
In both cases, to determine the profitability threshold, it is important to first calculate the costs of the enterprise. To do this, we introduce the concept of fixed and variable costs.
Fixed costs do not change over time and are not directly dependent on sales volume. However, they can also change under the influence of, for example, the following factors:
- changes in company performance;
- expansion of production;
- changes in rental prices;
- changes in general economic conditions, etc.
These typically include the following costs:
- payment of management expenses;
- rent;
- depreciation deductions.
Variable costs are a more unstable value, which depends on changes in production volume. This type of cost includes:
- payment of wages and other deductions to workers;
- costs of raw materials and the purchase of necessary materials;
- purchase of components and semi-finished products;
- energy payment.
Accordingly, the amount of variable costs will be higher, the greater the production volume and sales volume.
Variable costs per unit of manufactured goods do not change when the volume of its production changes! They are conditionally permanent.
Having defined the concept and types of costs, let’s find out how to calculate the break-even point (BEP) in kind. To do this we use the following formula:
BEP (in physical terms) = fixed costs / (unit selling price - variable costs per unit)
It is advisable to use this formula when the enterprise is engaged only in the production of one type of product. However, this is extremely rare. If an enterprise produces a wide range of products, then indicators for each type are calculated separately using a special extended formula.
When calculating the break-even point in monetary terms another formula is used:
BEP (in monetary terms) = (fixed costs / marginal profit) * revenue from product sales
For correct calculations, we use actual data on costs and revenue for the analyzed period. In this case, indicators that relate to the same analysis period should be used.
However, the use of this formula is correct when determining BEP with marginal profit, which is positive. If it is negative, then the BEP value is determined as the sum of fixed and variable costs that are relevant to a given period.
Video about the importance of determining the profitability threshold in business:
Or you can use another formula for calculating the profitability threshold:
BEP (in monetary terms) = Fixed costs / KMD,
where KMD is the marginal profit coefficient.
In this case, the KMR can be determined by dividing the MR (marginal income) by revenue or price. In turn, MD is obtained using one of the following formulas:
MD = V - PZO,
where B is revenue,
VZO – variable costs for sales volume.
MD = C - PZE,
where C is the price,
PZE – variable costs per unit of goods.
Calculation examples
For greater clarity, let’s look at examples of calculating the break-even point using the example of an enterprise and a store.
For an industrial enterprise
Let's say the following conditions are given. The company produces one type of product. At the same time, the cost per unit of production is 50,000 rubles. Price – 100,000 rubles. Fixed costs - 200,000 rubles. It is necessary to calculate the minimum volume of goods produced at which the enterprise will reach the profitability threshold. Those. we need to calculate the BEP in physical terms. We use the above formula and get:
BEP (in physical terms) = 200,000/(100,000-50,000) = 40 (product units).
Conclusion: thus, when producing at least 40 units of product, the enterprise will reach the break-even point. An increase in the volume of products produced by the enterprise will lead to profit.
For the store
In the following example, we will calculate the break-even point for a store. Let's assume that the store is a grocery store and has the following fixed costs (in rubles):
- rent of space – 80,000;
- salaries of managers – 60,000;
- insurance premiums – 18,000;
- utility bills - 10,000.
Total: 168,000 (rubles).
The conditions also give the values of the cost variables:
- energy payment – 5,000;
- raw material costs – 10,000.
- Total: 15,000 (rubles).
Let’s assume that the amount of revenue is 800,000 rubles. Let's define BEP in cost terms. First, let's calculate the marginal profit. To do this, subtract variable costs from revenue and get 800,000 – 15,000 = 785,000. Then the KMD will be 785,000 / 800,000 = 0.98.
Then the break-even point will be equal to fixed costs divided by the resulting coefficient, or 168,000/0.98 = 171,429 rubles.
Conclusion: Thus, the store must sell goods worth 171,429 rubles in order for income to be greater than expenses. All subsequent sales will bring net profit to the store.
Schedule
In order to find the profitability threshold, you can use the graphical method of calculating this indicator. To do this, we will display on the graph fixed and variable costs, as well as total (gross) costs. The break-even point graphically corresponds to the point of intersection of the gross revenue and total cost curves.
Let's look at this with an example.
The following conditions are given (in rubles):
- revenue amount – 100,000;
- production output – 100 (pieces);
- fixed costs – 25,000;
- variable costs – 30,000.
Having marked these data on the graph, we get the following conclusion: the enterprise will be at the break-even point when it receives income in the amount of 35,700 rubles. Thus, if an enterprise sells goods in quantities of more than 35 units, then it will record a profit.
Calculating the break-even point using formulas in Excel
It is very easy and convenient to calculate the profitability threshold using Excel - to do this, you just need to enter the initial data into the appropriate table, after which, using programmed formulas, we will obtain the value of the profitability threshold for our case, both in monetary and in kind terms.
You can download the calculation of the break-even point in Excel for a manufacturing enterprise specializing in the production of parts in the engineering industry at.
The graph and formula for calculating the break-even point in Excel for the general case are given
The reason a business is started is to make a profit. It is extremely important to know “onshore” how much you will need to invest in it at the start, and when these costs will begin to pay off.
Between these two “points” - the opening of an enterprise and the beginning of its receipt of income - there is an “intermediate station”, the so-called break-even point. That is, the state of the company’s activity when investments have already been justified, but income has not yet appeared; the company is said to have broken even.
Let's find out what factors influence the speed of reaching this point, and how to calculate it yourself.
The break-even point of an enterprise is an important success factor
The break-even point is calculated mathematically, using certain formulas. First, let’s take a closer look at this concept itself and understand how important this indicator is.
In the formulas, the break-even point will be denoted by the Latin abbreviation BEP, this is an abbreviation for break-evenpoint (profitability limit) - the volume of sales or performance of work or services at which profit is reset to zero. Profit in these calculations is the difference from subtracting expenses (TC - total cost) from income (TR - total revenue). BEP can be measured in physical or monetary terms.
Until the break-even point is reached by the enterprise, it is in the red and incurs losses. When it is passed, profit making begins. Therefore, this indicator is extremely important for understanding how stable and successful a company is. During different periods of the company's activity, the value of BEP changes, and these changes allow us to talk about the dynamics of its development.
More specifically, knowing the BEP value allows you to:
- at the initial stage, find out whether it is worth joining the project at all, investing in it, taking into account the data on its payback;
- when sales volume changes, calculate the value of product price adjustments or make reverse calculations in case of price changes;
- if actual revenue turns out to be higher than originally expected, determine whether it can be lowered without ending up at a loss;
- identify problems in the company and correct them in a timely manner.
What indicators are taken into account in the break-even point formula
How to determine the break-even point? To do this, you need to know the components of the calculations, first of all, the specific costs of the enterprise. They are divided into constants and variables, and it is important to be able to distinguish one from the other.
Fixed costs include rent for premises, depreciation, as well as salaries of management and other managers (both basic and additional), taking into account deductions.
Variable costs are fuel and energy for technological needs, materials (main and auxiliary), components, and semi-finished products. This also includes workers’ wages, also basic and additional (with deductions).
Fixed costs are called that way because they are slightly susceptible to fluctuations and changes. It is generally accepted that they practically do not depend on the volume of production and sales. Changes in fixed costs can occur under the influence of such factors as growth or decline in enterprise capacity, changes in the level of labor productivity, expansion due to the opening of new workshops or a reverse phenomenon, inflation, rent adjustments, etc.
But variable costs are precisely tied to production volumes, and accordingly, they change with them. The dependence is directly proportional: with an increase in production and sales volume, the amount of variable costs also increases.
But please note: we are talking specifically about the total amount of this indicator. At the same time, variable costs per unit of production do not change significantly with increasing production volumes. Experts say that variable costs per unit of production are conditionally constant.
Calculation formulas in monetary and physical terms
The break-even point formula exists in two main versions: in physical and monetary terms.
To calculate BEP in physical terms, the following indicators are needed:
- FC - fixed cost, that is, the sum of fixed costs per volume;
- AVC - average variable cost, the value of variable costs per unit of production;
- P - price, unit price of a product or service, work.
To calculate the break-even point, that is, the critical sales volume, in physical terms, use this formula:
BEP = FC/( P-AVC )
Similar calculations of BEP in monetary terms are made using the following indicators:
- FC — fixed cost, the amount of fixed costs;
- VC - variable cost, the sum of variable costs per volume or AVC - average variable cost, the value of variable costs per unit of production;
- P - price, price or TR - total revenue, income (revenue).
The formula for the break-even point in monetary terms also requires the calculation of the marginal income coefficient, that is, its share in revenue. First you need to find the value of marginal revenue itself (MR - marginal revenue), and this is the amount of revenue minus variable costs.
MR = TR - VC
But there is one nuance: revenue per unit of production is precisely the price of the product, it can be expressed by the formula: P = TR/Q, where TR, as we already know, is the amount of revenue, and Q is the sales volume. It turns out that marginal income is the difference between price and variable costs, only per unit of production: MR = P - AVC
Then we calculate the marginal income coefficient as follows:
Kmr = MR/TR
Or, if we calculate MR based on price:
The break-even point is also calculated in monetary terms: BEP = FC/ Kmr
As a result of the calculation, you will get a critical amount of revenue, that is, its level at which the profit is zero.
Break-even point for a store: calculation example
How to calculate the break-even point for certain types of enterprises and organizations? The easiest way to understand the system is through specific examples, especially since different types of activities have specifics. Let's start with a common type of business - a clothing store. Here, as in most cases, it is preferable to use the form of payment in monetary terms.
We will need figures for fixed costs that characterize the functioning of the store. These are the costs for:
- rent - 100,000 rubles;
- utilities - 15,000;
- advertising - 35,000;
- wages of sales consultants, cashiers - 123,080;
- deductions from salary (insurance contributions - 30% of total earnings) - 36,920.
Variable costs in our case are sales volume, let it be 600 units of goods, and the average purchase price, we took it to be 1000 rubles.
Summing up the fixed costs, we get 300,000 rubles. Variable costs are the product of price and quantity sold, that is, 600,000.
Marginal income: MR = 2,400,000 - 600,000 = 1,800,000 rubles.
We calculate the marginal income ratio:
Kmr = 1,800,000/2,400,000 = 0.75
We determine the break-even point: BEP = 300,000/0.75 = 400,000 rubles.
That is, in a new store you need to sell clothes worth 400,000 rubles, only then will you make zero profit. Everything that is sold for an amount over 400,000 rubles will go to profit. The store's financial strength is estimated at 1,800,000 rubles. This indicator tells you how much revenue can be reduced so as not to fall into the unprofitable zone.
We make calculations for the enterprise
The break-even point of an enterprise is calculated differently; here the formula in physical terms is most often used.
Fixed costs in our example:
- depreciation charges - 100,000 rubles;
- general plant expenses - 80,000;
- AUP salary - 100,000;
- utility costs - 20,000.
The total amount is 300,000 rubles of fixed expenses.
Variable costs:
- wages of main workers - 60 rubles. — per one unit of production;
- deductions from wages (insurance contributions - 30% of the total wages) - 20 rubles. per unit of production;
- materials costs (for the entire production volume) - 150 rubles.
- costs for semi-finished products (for the entire volume) - 90 rubles.
Total 320 rubles with a product price of 400 rubles.
Break-even point: BEP = 300000/(400 - 320) = 3750 pcs.
This means that this enterprise will have to produce 3,750 units of product in order to break even. Profit will be made when this volume is exceeded.
About nuances and assumptions
We have already learned how to calculate the break-even point. The main thing is to have a set of initial data and use them in the formula. The problem is one thing: business is a moving business, everything flows and changes quite quickly, and you have to react to the “movements” of the market. Otherwise, you won’t be able to keep up with your competitors. In the calculations, we have to make some assumptions, since it is impossible to monitor online, constantly making adjustments to the source code.
Here are the main assumptions:
- the company conditionally leaves the old price in the calculations, increasing sales volumes, although in reality this is unrealistic, especially if we are talking about a long period of the billing period;
- a similar situation with costs: they are unchanged in the formula, but in reality, most often, they change with an increase in sales volume, and even at full capacity - here the economic law of increasing costs comes into force;
- in calculating TB, we consider the product to be fully sold, although in reality it rarely happens so smoothly;
- We calculate the TB value for one type of product, and when there are several of them, we conditionally assume that the structure of types of goods is constant.
The most obvious way to visualize the break-even point is using a graph. To do this, we draw a revenue line, then a line of variable costs (sloping) and fixed costs (straight line). We get the value of production volume (sales) on the horizontal axis, and on the vertical axis we see the result of costs and income in monetary terms. Example in the picture:
Having calculated the sum of variable and fixed costs, we will derive a line of gross costs. Where will the desired break-even point be on the chart? At the intersection of the revenue and gross cost lines. in the example given, this point represents 40% of sales volume.
At the break-even point, revenue is called threshold (critical), and the same term is used to describe sales volume.
The break-even point is the critical production volume. When the break-even point is reached, the profit and loss of the organization are zero.
The break-even point is an important value in determining the financial position of an enterprise. The excess of production and sales volumes above the break-even point determines the financial stability of the enterprise.
The break-even model is based on a number of initial assumptions:
- the behavior of costs and revenues can be described by a linear function of one variable - output volume;
- variable costs and prices remain unchanged throughout the entire planning period;
- the product structure does not change during the planned period;
- the behavior of fixed and variable costs can be accurately measured;
- At the end of the analyzed period, the enterprise has no inventories of finished products (or they are insignificant), i.e. sales volume corresponds to production volume.
Using the algebraic method, the zero profit point (break-even point formula) is calculated based on the following relationship:
I = S - V - F = (p * Q) - (v * Q) - F = 0
Where, I is the amount of profit;
S - revenue;
V - total variable costs;
F - total fixed costs;
Q - production volume in physical terms;
v - variable costs per unit of production;
p - unit price (sales price).
The break-even point determines what sales volume must be in order for the company to cover all its expenses without making a profit. In turn, how profit grows with changes in revenue (shows operating leverage (operating leverage)).
When determining the break-even point, you need to divide costs into two components:
- Variable costs - increase in proportion to the increase in production (volume of sales of goods);
Fixed costs do not depend on the number of products produced (goods sold) and whether the volume of operations increases or decreases.
The break-even point is of great importance to the lender because he is interested in the viability of the company and its ability to pay interest on the loan and the amount of the principal debt. Thus, the degree to which sales volumes exceed the break-even point determines the margin of stability (margin of safety) of the enterprise.
Let us introduce the following notation:
B - sales revenue.
Рн - sales volume in physical terms.
Zper - variable costs.
Postage - fixed costs.
C - price per piece.
Zsper - average variable costs (per unit of production).
Tbd is the break-even point in monetary terms.
Tbn is the break-even point in physical terms.
Break-even point formula in monetary terms:
Tbd = V*Zpost/(V - Zper)
Break-even point formula in physical terms (in units of products or goods):
Tbn = Zpost / (C - ZSper)
How far the company is from the break-even point shows margin of safety.
Formula for safety margin in monetary terms:
ZPd = (B -Tbd)/B * 100%
Safety margin formula in physical terms:
ZPn = (Rn -Tbn)/Rn * 100%
The margin of safety shows how much revenue or sales volume must decrease for the company to reach the break-even point.
The margin of safety is a more objective characteristic than the break-even point. For example, the break-even points of a small store and a large supermarket can differ thousands of times, and only the margin of safety will show which of the enterprises is more stable.
Financial strength margin shows the excess of actual sales revenue over the profitability threshold. The larger this value, the more financially stable the p/p is. Financial strength margin shows how much sales (production) of products can be reduced without incurring losses.
The excess of real production over the profitability threshold is a margin of financial strength of the company:
Financial strength margin= Revenue - Profitability threshold.
The margin of financial strength of an enterprise is the most important indicator of the degree of financial stability. The calculation of this indicator allows us to assess the possibility of an additional reduction in revenue from product sales within the break-even point.
In practice, three situations are possible, which will have different effects on the amount of profit and the margin of financial strength of the enterprise:
1) sales volume coincides with production volume;
2) sales volume is less than production volume;
3) sales volume is greater than production volume.
Both the profit and the margin of financial strength obtained with an excess of produced products are less than when sales volumes correspond to production volumes. Therefore, an enterprise interested in increasing both its financial stability and financial results should strengthen control over production volume planning. In most cases, an increase in a company's inventory indicates an excess of production.
Its excess is directly evidenced by an increase in inventories in terms of finished products, and indirectly by an increase in inventories of raw materials and starting materials, since the company incurs costs for them already when purchasing them. A sharp increase in inventories may indicate an increase in production in the near future, which must also be subject to rigorous economic justification.
Thus, if an increase in an enterprise’s reserves is detected in the reporting period, one can draw a conclusion about its impact on the value of the financial result and the level of financial stability. Therefore, in order to reliably measure the amount of the financial safety margin, it is necessary to adjust the sales revenue indicator by the amount of the increase in the enterprise's inventory for the reporting period.
Analysis of the cost-volume-profit ratio is sometimes called break-even point analysis in practice. This point is also called the "critical" or "dead" point or the "equilibrium" point. In the literature you can often find this point designated as BER (abbreviation “breakeven point”), i.e. point, or threshold, of profitability.
To calculate the break-even point (profitability threshold), three methods are used: graphical, equations and contribution margin.
At graphical method Finding the break-even point (profitability threshold) comes down to constructing a complex “costs - volume - profit” graph. The break-even point on the graph is the point of intersection of straight lines built according to the value of total costs and gross revenue. At the break-even point, the revenue received by the enterprise is equal to its total costs, while the profit is zero. The amount of profit or loss is shaded. If a company sells products less than the threshold sales volume, then it suffers losses; if it sells more, it makes a profit.
Revenue corresponding to the break-even point is called threshold revenue . The volume of production (sales) at the break-even point is called threshold production volume (sales), if an enterprise sells products less than the threshold sales volume, then it suffers losses, if more, it makes a profit.
Figure 1 - Break-even point
Equation method is based on calculating the enterprise’s profit using the formula:
Revenue - Variable costs - Fixed costs = Profit
Detailing the procedure for calculating the indicators of the formula, it can be presented in the following form:
(Price per unit × Number of units) - (Variable costs per unit × Number of units) - Fixed costs = Profit.
The equation method can also be used to analyze the impact of structural changes in the product mix. In this case, sales are considered as a set of relative shares of products in the total amount of sales revenue. If the structure changes, then the revenue volume may reach a given value, but the profit may be less. Under these conditions, the impact of a change in structure on profit will depend on how the assortment changed - towards low-profit or high-profit products.
A variation of the equation method is the marginal income method, in which the break-even point (profitability threshold) is determined by the following formula:
Break even= Composition and content of financial statements: Balance Sheet, Profit and Loss Statement. The purpose of financial documents and the possibility of their use in the management system.
The main sources of information for conducting financial analysis and adopting SD are accounting reports (Form 1 - Form 5).
Accounting statements must present an objective and complete picture of the financial position of the enterprise as of a certain date. Information compiled on the basis of the rules established by regulatory acts on accounting is reliable and complete. When generating financial statements, it is necessary to ensure the neutrality of information, that is, exclusively unilateral satisfaction of the interests of some user groups over others.
Book balance allows you to get a clear and unbiased idea of the property and financial status of the enterprise. It reflects the state of the enterprise’s funds in monetary terms as of a certain date in 2 sections.
Balance:
1. Property:
By composition of investments:
Non-turnover assets (fixed assets and intangible assets);
Current assets (inventories, cash, accounts receivable).
2. Finn resources :
By sources of formation:
Own capital (section 3 “capital and reserves”);
Borrowed funds (sections 4 and 5).
2 interrelated interpretations of balance have become widespread:
1. Subject-material - the balance sheet asset shows the composition and location of property, the presence of which is confirmed by inventory
2. Cost-effective - a balance sheet asset expresses the amount of the enterprise’s costs resulting from previous business operations and financial transactions and the expenses incurred by it for possible future income; the liability reflects the obligations that arose in the process of attracting assets; its interpretation is of a legal nature
All obligations are legally ranked according to the obligation and priority of satisfaction (primarily short-term debt). The economic significance of the balance sheet liability lies in the fact that it reflects the sources of property formation. One of the purposes of the balance sheet is to characterize changes in the financial state of the enterprise during the reporting period.
Balance classification:
1) By sources of information: inventory, book (based on the General Ledger), general (based on the statement);
2) By time of compilation: introductory, current, liquidation, separation (if there are divisions), consolidation (if a merger);
3) By volume of information: single (1 structural subdivision), consolidated;
4) By type of activity: commercial organization, investment fund, bank balance sheet, insurance company balance sheet, budgetary organization balance sheet;
5) By the nature of the activity: balance of main activities, balance of non-main activities;
6) By type of ownership: state (municipal) enterprises, private enterprises (community, partnership), organizations with foreign investments;
7) Gradually clearing the balance sheet of unnecessary indicators: gross, net (net).
In Form 2 “Profit and Loss Statement” - data on income, expenses and financial results are presented on an accrual basis from the beginning of the year to the reporting date. Here you can find information about the Finnish result, both for the reporting period and for the previous one.
The types of profit are reflected here:
Gross (the difference between sales revenue and c/c);
From sales (the difference between gross and commercial expenses);
Before taxes (from sales + balance from other income and expenses);
Net (after taxation, i.e. before taxation - income tax).
Form 3 “Capital Flow Statement”» - contains information about the amount of capital at the beginning of the period, its receipt and use during the year and reflects the carryover balance at the beginning of the year.
Form 4 “Cash flow report”- contains information about cash flows, their receipts, taking into account their balance at the beginning of the activity in the context of current, investment and financial activities.
Accounting data reporting allow you to identify financial the position of the enterprise, its solvency and profitability.
1 - Bukh. reporting makes it possible to look more deeply into the internal and external relations of households. subject and enterprise, assess its ability to timely and fully pay for its obligations.
2 - External accounting users. information based on reporting data, they have the opportunity to assess the feasibility of purchasing the property of a particular enterprise, avoid issuing loans to unreliable clients, correctly build relationships with existing customers, and also evaluate financial position of potential partners.
3 - According to the reporting data, the head of the enterprise reports to the founders and other management and control structures. A thorough analysis of reporting allows us to reveal the causes of shortcomings in the operation of an enterprise, identify reserves and outline ways to improve its activities. That. the importance of reporting is great.
As you know, every company operates to make a profit. Only by achieving this goal can the company ensure the stability of its work and the basis for expansion. The profit of the enterprise is expressed in the form of dividends on invested funds. The company's profitability attracts investors and helps increase its capital. One of the most important aspects of activity is the concept of break-even. It is considered the first step towards obtaining accounting and then economic profit. Let us next consider what the financial break-even point is.
Theoretical aspect
In economic science, determining the break-even point is understood as the normal state of a company in a modern competitive market, which is characterized by long-term equilibrium. In this case, economic revenue is taken into account - income at which the company's costs include the average market rate of return on invested funds. The company's normal income is also taken into account. Under these assumptions, the definition of the break-even point is as follows:
- This is the volume of sales of a product at which the profit from sales fully covers the costs of its production, including the average market interest on own assets and business (normal) income.
Operational efficiency
If a company makes an accounting profit (the balance of its sales income and cash costs for producing goods is positive), the break-even point may not be reached in economic terms. For example, revenue may be lower than the average market interest rate on capital. It follows from this that there are other, more profitable options for using your own assets that would allow you to receive more income. The break-even point of an enterprise, therefore, acts as a criterion for assessing the effectiveness of business activities. A company that does not achieve it operates ineffectively in the current market conditions. But this fact, of course, cannot be considered a clear reason for the company to go out of business. To resolve the issue of terminating the company's activities, it is necessary to study the cost structure in detail.
Income maximization
It is necessary for the optimal functioning of the company. The process of maximization is the calculation of the break-even point in economic terms. When exploring this procedure, the following concepts are used:
- Marginal income. It represents the amount by which the company's total profit changes when the output of a product increases by 1 unit.
- Marginal costs. They express the amount by which total costs change when production volume increases by 1.
- Total average cost is the sum of fixed, variable and sunk costs per unit of output.
From a certain point (when a certain volume of product output is established), the variable cost curve will be increasing, and the marginal revenue curve, accordingly, decreasing. To maximize profit, the fundamental ratio is between profit and costs when the volume of production increases by 1. It is clear that when marginal costs are less than income, as the quantity of goods increases, profit becomes greater. If costs are greater than revenue, then an increase in income will be facilitated by a decrease in output. Thus, it is possible to formulate a criterion under which profit will be maximum: it is achieved when the marginal indicators of revenue and costs are equal.
Break-even point: how to calculate?
There are several points that need to be paid special attention to. First of all, the problem is to establish the critical volume of goods at which the break-even point of production is reached. There are three approaches to solving this problem:
- The equation.
- Establishing marginal income.
- Graphic image.
Also of particular importance will be the analysis of the break-even point (forecast) to changes in assumptions.
The equation
This break-even point method involves drawing up the following diagram:
- Income - Variable expenses - Fixed costs = Net profit.
The last indicator can be denoted as PR. P is the selling price of a unit of goods produced, x is the volume of manufactured and sold products for the period, a is fixed and b is variable costs. Using these notations, we can create the following equation:
- P = P*x - (a + b*x), or P = (P - b)*x - a.
The last equality indicates that all factors are divided into criteria that depend and do not depend on the volume of sales. In the process of determining the parameters, costs were divided into products sold and products released. This difference is considered the most significant in two approaches to management accounting: Direct costing and Absorption costing. In the latter case, costing is performed with the distribution of all costs between the goods sold and its balance. In other words, fixed costs are inventory intensive. When using the second method, fixed costs are allocated entirely to sales. Using the first equation, you can easily calculate the break-even point. To do this, you need to carry out simple mathematical transformations. From the condition P = 0, the volume of product output is established at which the company reaches the break-even point. The formula looks like this:
- xo = (P + a) : (P - c) = a: (P - c).
Example
Consider a hypothetical company that produces electronic components. The cost of one unit of goods is 5 thousand dollars, variable costs (price of components, staff salaries, etc.) for 1 product are 4 thousand dollars, fixed costs are 20 thousand dollars. Let’s find the maximum production volume at which the company's break-even point. The formula will be like this:
- xo = 20,000: (5000 - 4000) = 20 (product units).
The time during which the found quantity must be produced and sold will correspond to the period during which the amount of fixed costs will be found. Using the equation given in the previous paragraph, you can determine the amount of output that should be achieved to obtain a specific amount of profit at which the break-even point will be reached. How to calculate a company's income, for example, of 10 thousand dollars? To do this you need to issue:
- x = (10,000 + 20,000) : (5000 - 4000) = 30 (units).
Marginal profit
This method is considered a modified version of the previous method. Marginal profit will be considered the income that the company receives when producing one product. Using an example, let's find it:
5000 - 4000 = 1000 per unit. 
For a more accurate representation of the area of relevance, the assumptions that are used in constructing the described models should be listed.
Total expenses and revenue
The behavior of these indicators is linear within the domain of relevance and is strictly defined. This provision is true only when the change in output volume is small in comparison with the market capacity of a given product. Otherwise, the linearity of the relationship between output indicators and revenue will be disrupted.
Expenses
All costs can be divided into fixed and variable. The former are independent of the volume of output within the area of relevance. This assumption greatly simplifies the analysis. However, at the same time, it significantly limits the scope of relevance. Indeed, under this assumption, the volume is limited by the fixed assets available. However, it is impossible to increase them or rent them. It seems more realistic to assume that the change in fixed costs occurs in steps. But it significantly complicates the analysis, since the graph of total costs becomes discontinuous. Variable costs remain independent of output within the scope of relevance. In fact, their value is presented as a certain function of production volume, since there is an effect of a decrease in the maximum productivity of factors. In this regard, under the assumption that fixed costs are independent of output volume, variable costs increase with its growth. 
Sales price
The assumption that it also remains unchanged is considered the most vulnerable point. This is due to the fact that the selling price depends not only directly on the work of the company, but also on the structure of market demand, the activities of competitors, and so on. The company's expenses on promoting its products, forming its distribution network, and much more also have a significant impact on the change in the indicator. Here, therefore, it is necessary to examine the many factors influencing the subsequent assessment. But such an analysis is quite complex and requires an individual approach in a particular situation.
Other assumptions
The assumption that the services and materials used in production remain unchanged is also highly controversial. However, it makes the assessment much easier. The following assumptions also apply:
- Performance remains unchanged.
- There are no changes in the structure. It makes sense to dwell on this assumption in more detail. Above we considered the release of one unit of goods. Accordingly, problems of allocating costs for different products, setting their prices, or determining the effectiveness of one or another production structure did not arise. In conditions of variability, assessment requires the use of additional criteria. The sales break-even point can only be accurately determined for a specific product release structure.
- Only the quantity of goods produced has a relevant impact on costs. This assumption is of particular importance for the analysis. In this case, one should abstract from the influence of external factors and include in fixed costs all costs that do not depend on the quantity of production.
- Production and sales volumes are equal or changes in beginning and ending inventories are insignificant.
Sensitivity rating
The above assumptions have little applicability in the real world. However, they can be adapted to reality through sensitivity analysis. This method involves using the “what will happen if...” technique. Within its framework, you can get an answer to the question of how the result will change if the initially designed assumptions are not achieved or the situation with them changes. The tool used in this analysis is the margin of safety. It represents the amount of revenue that is at a level lower than the break-even point. This amount shows the limit to which income can decrease so that there is no minus. Once the underlying assumptions regarding changes in underlying assumptions have been made, the resulting adjustments to the margin of safety and contribution margin must be identified. In management accounting, cost behavior is continuously assessed and the break-even point is periodically identified. At its core, sensitivity creates an elasticity of margin relative to tolerances.
Estimates of costs and prices for future periods
The operating company takes these indicators from its own statistics and the behavior of product costs, taking into account expected changes in the economy. In particular, seasonal fluctuations, the activities of competitors, and the emergence of substitute products (especially in high-tech markets) should be taken into account. New companies cannot rely on their experience because it is missing. For them, therefore, calculations by analogy with already operating firms in this industry will be relevant. Along with this, you can use various reference information. The most difficult thing is to create a company that will work in a non-existent sector. In this case, careful costing and marketing research should be carried out. For such firms, it is advisable to use cost-plus pricing. The price in this case is obtained by adding a fixed margin to the total costs. In this option, the size of the marginal income is known, therefore, the break-even point is easily found.
Conclusion
Considering methods for establishing the break-even point, it is thus assumed that the cost of producing a unit of goods and the selling price act as external factors. In other words, by the time the desired indicator is found, these values are known and cannot be changed. Establishing these key parameters and their in-depth analysis allows, in turn, to study the company’s break-even planning.
