What is the Break-even-Point?
The Break-even-Point, also known as the breakeven or breakeven level, represents the juncture at which a company precisely covers the costs associated with the production of goods or services, resulting in neither profit nor loss.
For startups, the Break-even-Point is a pivotal milestone in financial planning. It signifies the moment when a startup's revenues match its expenditures.
Significance of the Break-even-Point for Startups
Assessing Viability: The Break-even Point assists startups in determining how long they can financially sustain themselves without tapping into new investments or revenue streams. It serves as an indicator of financial stability.
Financial planning: By establishing the Break-even-Point, startups can plan their financial strategy, determining the amount of revenue needed to cover costs. This is crucial for budgeting and resource allocation.
Convincing Investors: The Break-even-Point indicates when investors can expect a return on their capital and gauges the level of risk associated with the investment.
How to Calculate the Break-even-Point
The calculation of the Break-even-Point is based on the following variables:
Fixed Costs (FC): These are costs that remain constant irrespective of the quantity produced, such as rent, salaries, insurance, etc.
Variable Costs per Unit (VC): These are costs that increase with each unit produced, such as material costs and per-unit labor costs.
The formula for calculating the Break-even-Point is:
Break-even-Point = Fixed Costs/(Selling Price per Unit−Variable Costs per Unit)
Thus, the Break-even-Point indicates the number of units of a product or service that must be sold for the company to break even—neither incurring losses nor making profits. If actual sales quantities surpass the Break-even-Point, the company generates profits; if they fall below, losses are incurred.
Example:
Suppose a startup sells sustainable trousers. Fixed costs amount to €50,000 per month, and the trousers are sold for €100 per unit. The startup incurs variable costs of €30 per unit. The Break-even Point in units is then calculated as:
Break?even?Point = 50.000/ (100?30) = 50.000/70 = 714,3 Einheiten im Monat
This implies that the startup must sell at least 715 units of its product monthly to reach the Break-even-Point.
Limitations of the Break-even-Point
The Break-even-Point has its limitations. It assumes constant costs and a constant selling price, which is rarely the case in reality. Moreover, it does not account for the time needed to reach the Break-even-Point, a crucial consideration in dynamic markets. Hence, the Break-even-Point is often determined not solely through this simplified formula but through detailed financial models, allowing for the consideration of a startup's individual perspectives and simulating the trajectory and timing of the Break-even-Point.
The Evolution of the Break-even-Point Over Time
The Break-even-Point is not static and evolves over time. As a startup grows and gains more experience, cost structures may change, influencing the Break-even-Point. Continuous monitoring of this value is crucial to ensuring the financial health of a startup.
Conclusion
The Break-even-Point aids startups in assessing and planning their financial performance. It serves as an indicator of the breakeven level, revealing how much revenue a startup must generate to cover its costs. Calculating the Break-even-Point enables startups to optimize their financial strategy and convince investors, while continuous monitoring ensures that the company stays on the right track.