Break-even

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Break-even (or break even), often abbreviated as B/E in finance (sometimes called point of equilibrium), is the point of balance making neither a profit nor a loss. It involves a situation when a business makes just enough revenue to cover its total costs. [1] Any number below the break-even point constitutes a loss while any number above it shows a profit. The term originates in finance but the concept has been applied in other fields.

Contents

In economics

A simplified cash flow model shows the payback period as the time from the project completion to the breakeven. Cash Flow Model in Project Portfolio Management Simulation SimulTrain(R).jpg
A simplified cash flow model shows the payback period as the time from the project completion to the breakeven.

In economics and business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or loss has not been made, although opportunity costs have been "paid" and capital has received the risk-adjusted, expected return. In other words, it is the point at which the total revenue of a business exceeds its total costs, and the business begins to create wealth instead of consuming it. [2] It is shown graphically as the point where the total revenue and total cost curves meet. In the linear case the break-even point is equal to the fixed costs divided by the contribution margin per unit.

The break-even point is achieved when the generated profits match the total costs accumulated until the date of profit generation. Establishing the break-even point helps businesses in setting plans for the levels of production it needs to maintain to be profitable. [3]

In finance

The accounting method of calculating break-even point does not include cost of working capital. The financial method of calculating break-even, called value added break-even analysis, is used to assess the feasibility of a project. This method not only accounts for all costs, it also includes the opportunity costs of the capital required to develop a project. [4]

In other fields

In nuclear fusion research, the term break-even refers to a fusion energy gain factor equal to unity; this is also known as the Lawson criterion. The notion can also be found in more general phenomena, such as percolation. In energy, the break-even point is the point where usable energy gotten from a process equals the input energy.

In computer science, the term (used infrequently) refers to a point in the life cycle of a programming language where the language can be used to code its own compiler or interpreter. This is also called self-hosting.

In medicine, it is a postulated state when the advances of medicine permit every year an increase of one year or more of the life expectancy of the living, therefore leading to medical immortality, [5] barring accidental death.

In Association football, the break-even requirement was adopted by UEFA. It is known as UEFA Financial Fair Play Regulations. Its purpose is to prohibit clubs from spending more money on transfers than they earn as businesses, i.e. revenue per each fiscal year excluding donations from sponsors or advertisers. [6]

Related Research Articles

In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would have been had by taking the second best available choice. The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen". As a representation of the relationship between scarcity and choice, the objective of opportunity cost is to ensure efficient use of scarce resources. It incorporates all associated costs of a decision, both explicit and implicit. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure, or any other benefit that provides utility should also be considered an opportunity cost.

The net present value (NPV) or net present worth (NPW) is a way of measuring the value of an asset that has cashflow by adding up the present value of all the future cash flows that asset will generate. The present value of a cash flow depends on the interval of time between now and the cash flow because of the Time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications.

<span class="mw-page-title-main">Cost</span> Money spent to produce or procure goods or services

Cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental costs and benefits or advantages – in short, about the "triple bottom line" – for each proposed alternative. It is one aspect of true cost accounting (TCA), along with Human capital and Social capital. As definitions for "true" and "full" are inherently subjective, experts consider both terms problematic.

Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage to the product's unit cost. Essentially, the markup percentage is a method of generating a particular desired rate of return. An alternative pricing method is value-based pricing.

<span class="mw-page-title-main">Depreciation</span> Decrease in asset values, or the allocation of cost thereof

In accountancy, depreciation is a term that refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.

Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares.

<span class="mw-page-title-main">Income statement</span> Type of financial statement

An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

<span class="mw-page-title-main">Break-even point</span> Equality of costs and revenues

The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". In layman's terms, after all costs are paid for there is neither profit nor loss. In economics specifically, the term has a broader definition; even if there is no net loss or gain, and one has "broken even", opportunity costs have been covered and capital has received the risk-adjusted, expected return. The break-even analysis was developed by Karl Bücher and Johann Friedrich Schär.

In economics and accounting, the cost of capital is the cost of a company's funds, or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

<span class="mw-page-title-main">Net income</span> Measure of the profitability of a business venture

In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.

In business, operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income to net sales, usually expressed in percent.

In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.

<span class="mw-page-title-main">Gross margin</span> Gross profit as a percentage

Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold, then divided by the same selling price. "Gross margin" is often used interchangeably with "gross profit", however, the terms are different: "gross profit" is technically an absolute monetary amount, and "gross margin" is technically a percentage or ratio.

<span class="mw-page-title-main">Revenue recognition</span> Accounting term

The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned, no matter when cash is received. In cash accounting—in contrast—revenues are recognized when cash is received no matter when goods or services are sold.

<span class="mw-page-title-main">Total cost</span> Total economic cost of production

In economics, total cost (TC) is the minimum financial cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes inputs such as labor and raw materials, plus fixed cost, which is independent of the quantity of a good produced and includes inputs that cannot be varied in the short term such as buildings and machinery, including possibly sunk costs.

In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting it out, selling it, or using it differently. The term also applies to foregone income from choosing not to work.

<span class="mw-page-title-main">Profit (economics)</span> Concept in economics

In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both explicit and implicit costs.

<span class="mw-page-title-main">Cost–volume–profit analysis</span> Cost accounting model

Cost–volume–profit (CVP), in managerial economics, is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.

<span class="mw-page-title-main">Monopoly price</span> Aspect of monopolistic markets

In microeconomics, a monopoly price is set by a monopoly. A monopoly occurs when a firm lacks any viable competition and is the sole producer of the industry's product. Because a monopoly faces no competition, it has absolute market power and can set a price above the firm's marginal cost.

References

  1. Jones, Rob (2019). Business Student Book 2. Pearson Education Limited.
  2. Levine, David; Michele Boldrin (2008-09-07). Against Intellectual Monopoly. Cambridge University Press. p. 312. ISBN   978-0-521-87928-6.
  3. "BBC – GCSE Bitesize: Breakeven point" . Retrieved 2015-09-08.
  4. Brealey, R., Myers, S., Marcus, A., Maynes, E., Mitra, D. 2009. Fundamentals of Corporate Finance. McGraw-Hill Ryerson. USA. pp. 284. ISBN   978-0-07-098403-5
  5. Kurzweil, Ray; Grossman, Terry (2004). Fantastic Voyage: Live Long Enough to Live For Ever . Rodale Books. ISBN   978-1579549541.
  6. Page 38 (44 in PDF)