Many people consider the understanding of the Break Even Point (BEP) as the breakeven point. But that’s not true. In accounting, the breakeven point is referred to as the Return of Investment (ROI).
ROI means that the capital you invest in running a business can generate profits within a certain period. So, what is the definition of BEP? Let’s read the full explanation in this iReap article.
- Definition of Break Even Point
- What is the function of the break even point?
Definition of Break Even Point According to Experts
What is BEP? Break even point is a calculation where the future business revenue equals the amount of capital invested. If confused, BEP can be understood as the break-even point of a business.
In the book “Financial Statement Analysis,” it is mentioned that the definition of Break Even Point (BEP) is the condition where the company neither gains profit nor incurs losses.
In other words, the costs incurred during the production process of a product are covered by the revenue from selling that product.
To better understand BEP, consider the following definitions of BEP according to experts:
1. BEP = Earnings Before Tax and Interest
According to experts like Garrison and Noreen, BEP emphasizes the sales figure that needs to be achieved to cover the total operational costs incurred earlier.
The accumulation of product sales value is said to reach BEP when the accumulated profit is net profit and is equal to the costs incurred for production.
Garrison and Noreen also explain that BEP is the total sales before taxes and interest, which need to be carefully calculated by first looking at the variable and fixed costs incurred during production.
2. BEP = Cost Volume Profit Analysis
For business management expert Abdullah, the break even point is one of the indicators of cost volume profit analysis, where the company’s management can decide on the selling price related to the company’s financial condition. This is done after considering some aspects related to BEP, such as:
- Determining the minimum production figure to avoid losses when the demand is not higher than the offer.
- Determining the quantity of products or services that must be sold in the market to achieve a certain profit figure.
- Determining the percentage of sales decline that the company can tolerate to avoid significant losses.
3. BEP is the Volume of Sales Equal to the Amount of Costs
According to experts like Henry Simamora, Bambang Riyanto, and Rony, BEP is achieved when the revenue from sales exactly matches the expenses or production costs incurred during the production process.
In other words, there is no net profit or net loss for the business owner.
4. Profit Equals Zero
According to economics and business education practitioners like Mulyadi, Sigit, and PS. Djarwanto, BEP is a method used by a business owner to calculate the minimum sales volume to avoid losses or achieve zero profit.
For laypeople, this condition is considered as a break-even point. This means that when calculating profit and loss, it is found that the business does not make a profit but does not incur a loss either.
5. Total Revenue = Total Cost
Another definition of BEP, according to Zulian Yamit and S. Munawir, is that BEP occurs when the total revenue equals the total production costs, including both fixed and variable costs.
So, how can you quickly and easily determine if a business has reached BEP? You can use the iReap cash register application.
This is because the iReap cash register application is based on the calculation of BEP explained above. Moreover, using this application allows new business owners to quickly determine the break-even point of their business with a simple method.
What is the Function of Break Even Point?
If return on investment functions as an analysis of the efficiency of the capital used, BEP has the function of optimizing what is produced to obtain optimal profits.
For clearer understanding, here are the functions of BEP:
1. Determining the Volume of Produced Goods
The benefit of BEP for entrepreneurs is to determine the volume of goods to be produced. This means you can obtain profit projections that the company may achieve after determining the production volume.
2. Further Process Efficiency
As a business owner, you can determine the next steps for efficiency. For example, reducing burdens considered unnecessary for the company’s performance.
3. Knowing Changes in Profit Value
The existence of BEP calculation allows you to easily know the changes in profit values that may occur when there are changes in product prices. This is in line with the definition of BEP, which states that the BEP value and the selling price of the product are in a linear relationship.
What does it mean? Well, when one point in this definition is high, the other point within the same line will also be high. However, remember that the BEP calculation will only be accurate if you calculate its components, namely fixed costs, variable costs, selling prices, and revenue.
You now know the definition of BEP and the functions of BEP from this article. However, to have a better understanding, also read about the benefits of BEP here: Benefits of BEP for Companies.