Break even is a fundamental financial indicator to follow if you want to keep your business financially balanced. Learn more in this post
The Break Even concept is fundamental for any business that is looking for financial balance. But maybe this term is new to you, so we’ll talk more about it in this post.
Often, we start a business without having a deeper knowledge of some concepts that business accounting encompasses. Go by me, this is much more common than you might think. So let’s start with the basics: do you know what financial balance is?
Financial balance is what brings stability to your results. And the good news is that understanding and finding that balance point is not complicated.
Even without in-depth and specific knowledge in the area, you can find your agency’s balance point. But for this it is essential to know how to calculate your break even.
Read this post to the end to learn all about the subject and how to make your business in good financial health.
After all, what is Break Even?
If we do a direct translation, the meaning would be ‘to tie’.
But when we bring it to the world of business accounting, we understand that the break even is the point of balance of a business . That is, when there are no losses or profits.
Every business has an initial investment, and it can take a while for the value to be fully returned. Do you know that moment when the business starts to recover these values? This is the balance point, or rather, the Break Even.
But not only that. There is a calculation anyone can do to find this important indicator.
On a monthly balance sheet, when expenses equal income, we can identify that the point in question has been reached.
And for agencies? What is the importance of Break Even?
The dream of any business is to have good financial health. With agencies it is no different.
The growth of the Digital Marketing segment and all the technological advances that we witness every day when we use our cell phone or computer, means that the agency market continues to rise constantly.
What is the result of this? On the one hand, it’s good: it creates more opportunity for everyone. On the other hand, it’s bad: increasing competition and much of the same.
The point is that many agencies start without planning and unfortunately end up opting for the difficult decision to close the business.
Having good planning and being aware of the importance of the financial balance point of your business is essential to not be just one more among so many options.
By closely following your Break Even, it is possible to understand which results below it will mean losses and which above will mean profits.
Knowing this financial indicator of your agency also helps in pricing the products and services offered.
How to calculate your business’s Break Even
The term ‘calculate’ can sometimes even be frightening. Very calm at this time! It’s much simpler than you might think.
Taking into account that Break Even is the amount necessary to cover the fixed and variable costs of a business , we need to consider some aspects when calculating.
To make it easier, let’s use the practical example of a Digital Marketing agency with fictitious values:
- Variable costs : costs that the agency has to perform the services offered (BRL 20 thousand)
- Fixed costs: fixed expenses for the agency to operate, such as rent, electricity, water, internet and others (BRL 15 thousand)
- Sales: sum of the agency’s total sales (BRL 60 thousand)
- Contribution margin: sale price of the service offered by the agency, subtracting the expenses and variable costs related to it (R$60 thousand – R$20 thousand = R$40 thousand)
After considering the aspects listed above, it’s time to apply a simple mathematical operation:
First, divide the variable costs by the total contribution margin (recall that the contribution margin is the total sales minus the variable costs). Then divide the amount of fixed costs by the result of that division.
That is, fixed costs (R$15 thousand) divided by the contribution margin (R$40 thousand).
The result is 0.3. This is your contribution margin index.
From there, you just need to divide your fixed cost (R$15,000) by the contribution margin ratio we just calculated (0.3). The result is R$ 50 thousand.
Therefore, R$ 50 thousand is your Break Even , that is, the financial balance point of your business.
According to the aspects used in this practical example of an agency, this would be the amount needed to cover all of your agency’s expenses (both fixed and variable).
It is important that you understand that to know your Break Even, just follow this step-by-step above by entering the corresponding values for your agency, whether they are round numbers or not.
interpreting the results
Once you know your business’ breakeven point, you can analyze fixed and variable costs. Thus, you identify what can be saved or what needs to be invested.
Another important point is that you can understand if the sales of your agency’s products and services are paying off or if a price adjustment is necessary.
Believe me, over time, this could end up being forgotten, which is not healthy for your business.
Knowing your Break Even, it is possible to understand exactly in which aspects you gain or lose revenue.
I invite you to make this reflection: is that service that you have been providing for a long time at your agency is still profitable or is it no longer covering the costs involved?
To get the answer to this question, you will need to calculate your Break Even.
There is no way, any business needs investment. Even if it’s time.
So, get your hands dirty and good accounts!
Extra: tips for having good financial management in your agency
As we are talking about financial health, here are some general tips that we recommend you follow in your business:
Map and manage processes
In any area of your business, without processes, you will hardly be able to have a workflow that brings the expected results.
Mapped processes allow identifying failures and obstacles that bring bad results and negatively affect financial management.
Well-managed processes optimize time, effort and investment.
If you needed planning to start your business, to have a good financial management, planning is also essential.
Are you thinking of making a new investment? Stop, reflect, and plan every step necessary to reach that goal.
Good operational planning allows you to see the ‘whole’ and be better prepared for possible setbacks along the way.
Look at your business with a focus on always improving it
It is very important that this behavior comes from the business owner. Like? Include in this mission actions such as: reducing expenses, monitoring expenses, making periodic balance sheets, preparing cash flow , among others.
This is a very important exercise to have good financial management, as this constant search for improvement will make it easier to avoid unnecessary expenses. Focus on what generates results.
Track and analyze the work and results
Always seek to revisit processes and the results they generate. By following and analyzing closely, you can identify what can be adjusted to improve them even further.
Without monitoring and analysis, you will hardly be able to know if your financial management is being assertive and strategic for your business.
If you want to put all these tips into practice, be sure to visit our Agency Financial Management Dashboard. We have prepared a spreadsheet for you to map and monitor your entire financial flow and have greater control over your business!