With the end of the rising economy, the need for break-even point analysis, which is useful for management decisions on fixed cost reduction, has increased. When business cannot be expected to increase, reducing fixed costs becomes an important management issue.
If you cannot identify the “break-even point” that is the point of whether you will be in the black or in the red, you will misread the numbers in important situations such as how to make a budget and invest in new businesses, and it will lead to cost reduction. You may miss it.
Here, we will explain how to decipher the break-even point between sales and profit and loss.
What is business?
Business are the total amount of sales earned by providing a company’s main products and services. Sometimes called business, it is one of the revenue categories in corporate accounting.
For example, if one product sold at a unit price of 100 yen is sold, the sales will be 100 yen. And if 10 products are sold in a certain period of time, the company will record sales of 1,000 yen. Of course, the more sales you make, the more profitable your company will be, so every company will focus on increasing sales.
Difference between sales and profit
When thinking about sales, one thing to keep in mind is the difference from profit.
Sales are “how much you sold”, disregarding costs. However, in reality, it costs money to purchase the product. Profit is the amount of money you make by subtracting the purchase price from your sales.
Profit is an important indicator when judging a company’s financial position, but sales also occupy a very important weight. This is because the scale of sales can be a criterion for financing financial institutions as well as profits.
In addition, the positioning of sales and profits differs depending on the current state of the company. At the stage of increasing customers, we must focus on increasing sales. On the other hand, there may be times when you need to cut costs and make a profit even if sales fall.
What is the break-even point?
The “break-even point” allows you to determine whether a company will be in the black or in the red while looking at the relationship between sales and profits. The break-even point indicates that the company’s sales and expenses are equal. It is a boundary point that it is not in the red instead of being in the black. In other words, as long as there is no borrowing, if sales reach the break-even point, the status quo can be maintained even if there is no profit.
In order to derive the break-even point, the costs must be divided into “fixed costs” and “variable costs”. Fixed costs are expenses that are incurred regardless of sales, such as insurance premiums and office rent. Variable costs, on the other hand, refer to costs that increase in proportion to sales, such as purchasing costs and utility costs for processing equipment.
The break-even point is that sales and expenses are equal, and it is also the “target number of sales that must be cleared at least”. Let’s clarify the profit structure of the company in the income statement and utilize the break-even point so that the correct business plan can be constructed.
Check sales and fixed costs on the income statement
Sales are listed at the top of the “Profit and Loss Statement,” which is one of the financial statements that show the business performance of the company. The income statement is like a company report card, which shows the business performance of a company over a certain accounting period. It is a material for grasping the sales and profits of the company, and plays a very important role in judging the financial structure and profitability of the company.
Let’s extract fixed costs from the costs on the income statement. Extract personnel expenses, rent, depreciation expenses, insurance premiums, etc. from selling, general and administrative expenses on the income statement and aggregate them as fixed costs.
The income statement includes sales, cost of sales, and gross profit. Gross profit can be calculated by subtracting the cost of sales from the sales.
Gross profit, also known as gross profit, is the source of all profits. If the cost of sales can be kept low, the gross profit will increase and the profitability of the company will increase. Therefore, it is important to increase sales and reduce cost of sales. On the other hand, if the gross profit is small, the cost of sales may be too high and you may be reducing your profits.
Depending on the business format, it may or may not be easy to increase gross profit. If you are in the manufacturing industry, you can reduce the cost of sales and increase the gross profit. In the retail industry, gross profit tends to be low because purchasing costs are high and cost of sales is high.
Know the business situation of a company from sales
Without sales, a company cannot survive and cannot provide value.
If you can read the break-even point and income statement correctly, you can understand “how much money the company spent and how much money it had and how much it remained”. Let’s grasp the situation of the company based on sales.