Having discussed some basic finance concepts in the previous episode, there is one major aspect of business that you must grasp.
Your business has to make profit or break even, to be able to keep running. Today, the concept known as the Break even point will be discussed.
What is a Break Even Point (BEP)? How do you measure or analyse a Break Even Point?
According to wikipedia, a Break Even Point (BEP) is an economics or cost accounting concept. It is the point at which total cost and total revenue are equal. A situation where there is no net loss or gain, and one has "broken even."
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To fully understand your Break Even Point, you have to run a Break Even Analysis.
A Break Even Analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point.
According to investopedia, it is a supply-side analysis; that is, it only analyses the costs of the sales. It does not analyse how demand may be affected at different price levels.
A simple formula to calculate the break even analysis is:
BEP= (Fixed cost/(Unit Price-Variable Cost))
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For example It costs Ada N500(variable cost) to make one bead, and she pays N1,000 for her shop space(fixed cost).
To calculate her break even point, if she sells the beads at N100 each:
(1000/(100-50))= 20 beads. Which means she has to sell 20 beads to break even.
Watch this video to properly understand the break even point analysis.
