What is the Importance of Reaching the Balance Point in a Company?

The equilibrium point is the one at which the profits and costs they are exactly the same, that is to say that nothing is spent or lost. You sell what you earn, you do not win or lose. When an entrepreneur starts with a project this is the point they want to reach, since the profits cover their expenses and those of the company. Knowing the equilibrium point of the company is very useful, since it leaves you well placed before the expenses and profits of the company.

However, we must know that this point should not be the finish line for the companyIn fact, what you are looking for is to quickly get out of the breaking point, this is because what you are looking for is earnings not being in balance.

The point of balance should be considered as the starting point, since once what is spent is earned, later it should be earned much more than what is spent in the company, the breakeven point helps to evaluate the budget of the company.

businessman financial balance

It should be remembered that at this point there will be no remaining earnings, we must also take into account that the costs will increase, due to the constant demand for products.

How is the breakeven point of a company calculated?

Calculating the equilibrium point is a very simple task, we must take into account some aspects before performing this important calculation:

Fixed costs

They are the costs whose value never changes, they stay the same every month. Rentals could be considered as a fixed cost.

Variable costs

These are the costs that may change depending on your billing. It goes in conjunction with the volume of sales, since if the variable cost increases this too. People’s basic purchases could be considered a variable cost.

Total costs

It is the total of fixed costs and variable costs. A car purchase could be considered a total cost. The formula must be made: Total costs = Total profits.

Unit variable cost

It is where it is calculated variable costs between the number of units sold. The following formula must be carried out: Unit variable cost = Variable cost / Units sold.

To obtain the equilibrium point, the following formula is used: PEU = Fixed costs / Sales price – Unit variable cost.

businessmen team balance

Importance of the breakeven point

The point of balance should be an essential tool for posing situations of the company, likewise must be present at the time of updating the strategies of the company. That is, the balance point is the one who will say if there is profit or not in an investment. It must be the objective and goal of a company, but then it must be exceeded, it must not remain at that point.

As previously said, the first objective of the companies is to reach the equilibrium point, at this point the company’s calculations must be constantly reviewed, so we can know if we left that point and, we will know if the change was positive or negative.

It is the most basic way to know if a company meets all your expenses and investments, with the current price of the product being manufactured. When starting with the creation of the company we must take the balance point into account.

In this way, thanks to this calculation, we can do forecasts, strategies and predictions on the economic accounting part of the company, we will be able to know precisely the most accurate price for the product and the degree of realism.

It allows to check if the business is viable what is being done or not, if there is income and expenses in the financial part of the company. If the equilibrium point is no longer there, it is easy to bring it back to full equilibrium through calculations. All this and more allows you to determine the equilibrium point.

In short, the breakeven point helps entrepreneurs to determine the price of products, as well as help them to know when they will begin to obtain profits from their investments.

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