Balance, Financial and Economic Balance Point: Understand the differences

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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.

See also: Complete Pricing Manual

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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.

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32 COMMENTS

  1. Excellent information Rafael, muchas gracias for debunking this theme that sometimes becomes complex to understand, saludos

  2. Hi Marcelo, when calculating the contribution margin you should include the taxes on the direct costs related to the production of the product or provision of the service. Thus it will not have this "gap" in the final calculation

  3. And the calculation of income tax and social contribution, where are you considering, since for me to have an accounting profit or a return on investment obviously I will have to pay income tax on the values ​​that extrapolate the balance of the accounting balance?

  4. Hi Ludyane, what's your question? What did you try to do and where did you find it?

  5. suppose that the members of a company have invested the total R $ 1.000.000,00 in the business and want a return of 30% per semester what is the minimum amount that the company must produce and sell per month? Based on the degree of leverage calculated, what will be the profit, before taxes if there is an addition of 20% in the initial activity volume?
    Variable cost per unit manufactured 1,08
    Total Fixed Cost in month 60.000,00 being 30.000,00 depreciation
    Expenses Variables of sale per unit 0,60
    Fixed Total Year 15.000,00
    Produced and sold 150.000 uni
    4,0 sales

    help me I could not calculate

  6. Hi Eugenia, I also did not understand how you got in that value no. Trying to think of possibilities here, the contribution margin = revenue - cost = 1.600.000 - 780.000 = 820.000. The break-even point (without getting into the details) basically shows how much revenue you must have to tie up the expenses - in this case, it would be interesting to have the quantity of products sold to be able to better detail the costs.

  7. It will depend on what you mean by product mix. If you are referring to more than one product, you can individually calculate each of the products

  8. HOW SHOULD I WORK (CALCULATE) WHEN I SPEAK OF A MIX OF PRODUCTS ???

  9. Rafel, there is an exercise that I am training for a test and I am not able to arrive at the answer of the gabirito: The Company São Paulo S / A has to calculate its Point of Balance and for this the accounting raised the following data the total fixed cost for the period was R $ 500.000,00, variable costs are R $ 780.000,00 and sales revenues totaled the value of R $ 1.600.000,00, with this data the following monetary balance point was calculated ... the value answer is R $ 975.609,76 . I applied the three formulas and I do not know where I'm going wrong. Would you help me?! Thanks

  10. The contribution margin is the selling price minus the variable cost. By dividing your fixed cost by the contribution margin you find your break-even point, which is the equation that shows you the amount of products you need to sell for no profit or loss.

    In general, profit can be represented simply by revenue - expenses. If you have the variable of the quantity of products and the variable cost, you can calculate the profit as

    Profit = (sales price x qd sold - unit cost x qtd sold) - fixed expenses

  11. Hi Rafael,
    Thanks for answering me
    My doubt is: in order to determine the profitability of L, with the manufacture and sale of a product, I have to know the margin of contribution of the products sold
    And what is this variable that is referring to the text ??
    Ex: L = 100.000 / 3.33 = 30,03
    Would the variable be the result of the fixed price / contribution contribution?

    b / Determine the expression representing the monthly L_t profit obtained by manufacturing and selling N monthly units of the product.
    And how would you find this total monthly profit?

  12. Good morning, Rafael.
    I would like you to give me a way out of this question, because she has left me without sleep.

    That is the question :

    For this question, consider the following definitions:

    The profit obtained from a sale is the selling price less the costs involved (cost of manufacturing or purchasing from a supplier, taxes, etc.).
    The financial break-even point (as is very usual to say) is achieved when there is no profit or loss in a particular transaction or activity.
    After a survey on the process of manufacturing and selling a particular product, a manufacturer realized that:
    A third of the price of the price for which he sells his products to the stores is taxed, that is, it must be collected for the government;
    The raw material cost per unit of product is R $ 10,00;
    The payment of labor, machinery and facilities represents a monthly fixed expense, regardless of the quantity manufactured, of R $ 100.000,00.
    (a) Determine the expression of profit L with the manufacture and sale of a product, considering only the cost of raw materials and taxes, having as variable the price P of sale to stores.
    (b) Determine the expression representing the monthly L_t profit obtained from the manufacturing and sale of N monthly units of the product, sold to stores at the price P. For this profit, consider the expenses that affect each unit (raw materials and taxes ) and fixed expenses.
    (c) In order for the break-even point to be reached, how many units need to be produced in a month, considering that all units will be sold?

  13. Hi Kamilla, in the calculation we did not take into account the depreciation for the calculation. If you do, you will need to make the 22.000 / 200 account, which gives 110 the breakeven point.

  14. Rafael, I could not get your numbers.
    In PE Contabil for example, I found a damage of 2.000,00, ref. depreciation. (Total MC - Fixed - Depreciation).
    The result should not be zero, even with the depreciation expense?

  15. Hi John, thanks for the warning. I already corrected there in the post.

  16. Rafael, the acronyms are wrong.
    At the point of economic equilibrium is PEF and in financial is PEE.

  17. I understood friend, but when you called direct costs it seemed to me that it would be only the costs, when in fact the costs and expenses are variable. thanks for listening.

  18. Hi Elyvelton, it's just a matter of nomenclature. What you call variable expenses I'm calling in this article of direct costs, but that's right.

  19. the contribution margin would not be Selling price - VARIABLE COSTS?

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