Financial break-even refers to the level of sales or revenue required for a company to cover all of its costs, including both cash and non-cash expenses, resulting in zero net income or profit. In other words, it is the point at which a company’s total revenue equals its total costs, both fixed and variable, including non-cash expenses such as depreciation.
To calculate the financial break-even point, a company can use the following formula:
Financial break-even point = Total fixed costs + (Total variable costs / Gross profit margin)
Where:
- Total fixed costs: all expenses that do not change with changes in the level of production or sales, such as rent, salaries, and depreciation
- Total variable costs: the cost incurred for producing or providing each unit of product or service, which can vary with the level of production or sales
- Gross profit margin: the percentage of revenue that exceeds the cost of goods sold (COGS).
The financial break-even point takes into account all of a company’s costs, both cash and non-cash, and can help management understand the minimum level of sales required to cover all expenses and achieve profitability. However, it does not take into account other important factors such as taxes, interest payments, and opportunity costs, which can affect a company’s profitability. Therefore, it should be used in conjunction with other financial analysis tools to provide a more complete picture of a company’s financial performance.