Balance, Financial and Economic Balance Point
O balance point calculation is one of the most important methods for a good financial control of any business. With it you can understand the amount of sales that need to be performed so that the revenues equal costs and expenses, resulting in zero profit.
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However, there are 3 variations of the break-even calculation that may be important to know. See below:
- Accounting Balance Point
- Point of Financial Balance
- Point of Economic Balance
To calculate these 3 methods, you can take into account your accounting or management data, according to your reality and availability of information.
Before entering into the differences of each one, it is worth remembering the concept of margin of contribution, essential for the calculation of these 3 variations of the break even point, which is the unit selling price minus the direct costs for the production of a product or provision of a service.
Let's see the characteristics of each now:
Accounting Balance Point
This is the most commonly used method and shows you the amount of sales necessary to make your profit zero.
- Profit = Zero
- Formula: SGP = Fixed Costs / Contribution Margin
- Advantage: Take your accounting statements into account to show you exactly how much you need to sell to get zero profit. That is, any amount below that amount should be unacceptable to your business as it will result in loss.
Point of Financial or Cash Balance
It is also known as a cash balance point by some authors and does not take into account depreciation and amortization, factors that reduce the accounting profit but that do not represent cash out of your business.
- Profit = Zero - Depreciation
- Formula: PEF = (Fixed Costs - Non-Disbursable Expenses) / Contribution Margin
- Advantage: The calculation does not take into account expenses that will not go out of your box, showing you exactly how much you need to sell to get the profit zeroed. The only problem with this approach is that it does not prepare you for times of exchange of machines or equipment that will need to be changed in the future.
Point of Economic Balance
In this case, the company determines a minimum profit desired to be embedded in the calculation, representing a return to the capital invested in it. In practice, this calculation should always be used in conjunction with the balance-sheet, since there are always two parameters of financial analysis, how to sell in order not to lose and how much to sell to profit the desired one.
- Profit = Zero + Equity Remuneration
- Formula: PEE = (Fixed Expenditure + Desired Profit) / Contribution Margin
- Advantage: The calculation already takes into consideration how much you want to profit by helping you understand the amount of products or services that need to be sold for you to have a return.
Example of Calculation of the Accounting, Financial and Economic Balance Point
Imagine the following data of your company:
- Selling Price = R $ 400
- Direct Costs = R $ 200
- Fixed Expenses = R $ 20.000
- Depreciation = $ 2.000
- Opportunity Cost = R $ 5.000
Now we go to the calculations of the accounting balance point, point of economic equilibrium and financial equilibrium point. Before entering each of the formulas, it is worth already to calculate the contribution margin that will be used:
- MC = Sales Price - Direct Costs = R $ 400 - R $ 200 = R $ 200
Cool, now let's look at each of the accounts:
- Accounting Balance Point: PEC = R $ 20.000 / R $ 200 = 100 units
- Financial Balance Point: PEF = (R $ 20.000 - R $ 2000) / R $ 200 = 90 units
- Economic Equilibrium Point: PEE = (R $ 20.000 + 5000) / R $ 200 = 125 units
Break-even management applications
As I said at the beginning of the post, these calculations can be done using your accounting or management statements. I particularly prefer a managerial approach, with the use of a balance point calculation worksheet that uses the most important numbers of your business and gives you a clear answer as to what the number of closures should be, at a certain price, to balance revenues and expenses.