The entrepreneurial role is perhaps one of the most demanding of those that a person can assume due to the inherent demand and the risks that they assume when starting their own business. To weigh the results you obtain, the first thing you must be very clear about is what the breakeven point is.

Everyone who has the initiative to develop an enterprise must be trained - at least minimally - in accounting and finance. The basic terms with which you will obtain important information to weigh how the business is progressing must be fully mastered.

One of the concepts that you must be very clear from day one is the one that allows you to know from how many units sold you will start to earn money. Hence the crucial thing to know what the threshold of profitability is.

What is the breakeven point? Putting together the business plan

For a business to produce profits, it is required that the sales or income achieved exceed the costs that have been incurred for the production of the goods and services marketed.

Precisely the point where sales revenue and costs balance represents the breakeven point. It is also called the deadlock and is shown in economic graphs as the point where the lines that represent income and costs meet.

The expression deadlock then refers to the moment in which income equals production costs. Calling it that way refers to the moment in which it is neither won nor lost, accounting speaking.

Knowing this breakeven point in advance is extremely important to set sales goals, and even possible changes in prices or rates. This leads to a series of consequences that will be reflected in the marketing plans to be implemented.

Although this may seem simple - of course you have to exceed the costs to obtain dividends - the truth is that many administrative controls are needed to accurately arrive at these figures.

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Fixed and variable costs

The mere fact of knowing accurately the costs associated with a certain product or service can be challenging. Accountants must perform exhaustive calculations taking into account all the factors involved to find these numbers accurately.

Industrial production –and in general any company– makes a difference in the nature of the costs involved in the production process, dividing them into fixed and variable costs, depending on whether or not they are related to the quantities produced.

As the name suggests, fixed costs are those that are incurred even when nothing is being produced. They are a type of cost that is always present and is embedded in the fact that the company remains in business.

The typical fixed costs are those related to the rental of the headquarters, plant or office, the administrative staff and all those that do not vary according to the units produced. They are recurring costs that are not affected by the size of what is produced.

On the contrary, variable costs are those that arise as a result of the elaboration of the articles and products that are manufactured. The higher the production, the higher the variable costs.

Variable costs have to do with the inputs and raw materials that are required for the manufacture of products, as well as the personnel involved, since this can increase or decrease depending on the established production plans, thus exceeding the profitability threshold.

Neutral formula

What is known as the Q point is the amount of products that we need to place on the market to reach the neutral point. For this we use the formula that takes into account the price and the fixed and variable costs:

Q = CF / (P - CV)

(CF: Fixed Costs, P: Price, CV: Variable Costs)

Using this equation, we obtain the minimum sales goal so as not to lose money on our business. From then on we will be obtaining returns for the productive activity that we have decided to develop.

Thus, a certain product whose price is 18 euros of which 6 euros correspond to variable costs and that imply 1800 euros of fixed costs, will force us to sell at least 150 units in order not to lose money (150 = 1800 /).

If we sold above that amount, we would be making money, so our most immediate goal will be to place that number of products as soon as possible. Knowing this, we will review the performance that distribution channels and other commercial allies may have to achieve it.

Keep in mind that it is very important to determine the variable cost for each unit produced, which is one of the operands involved in the calculation of the Q point.

In other words, the difference between the price and the variable cost per unit produced is known as the contribution margin.

As we mentioned earlier, it is an accounting job in which nothing should be left out, under penalty of incurring costly errors that affect the viability of the venture.