Breakeven

Breakeven is the immediate goal of start-up businesses. Ultimately, of course, the business must make a profit sufficient to pay salaries, invest in new machinery, and cover necessary advertising. All the expenses associated with operating a thriving company must be paid out before profit starts.

Any business in its financial planning takes into account an initial period in which expenses will exceed income. Adequate capitalization enables the business to survive until it becomes profitable. The importance of this benchmark cannot be overemphasized.

Significance of Entering the Profit Column

If a company sells, say, 500,000 units of its product, that would be its breakeven point if selling fewer units would mean a loss. If the company sold 600,000 units the next year, and the point is still at 500,000 units, that extra 100,000 units puts the company into the profit column. Some might only look at the 100,000 units as creating profit, but it took the sales of the first 500,000 units to push the business into the profit column.

Understanding this make-or-break point of financial analysis shines a spotlight on the fixed expenses of a business. These expenses are usually contractual obligations, and they affect the operations of the business dramatically. Once past this point, however, units sold increase profits because the fixed expenses have been covered by the first 500,000 units.