Make a financial feasibility analysis, where one of the indicators taken into account is the Break Even Point (BEP). So, what is BEP and its benefits?
When starting a business, of course you need a comprehensive business plan so that the ideas in your head can actually be realized in reality. One way is to take into account the BEP.
Don’t worry if you still don’t understand this one thing because Labamu will discuss it thoroughly in this article. You can also learn how to calculate it. So, read until the end, OK!
What is BEP?
In simpler language, Break Even Point (BEP) is the break-even point at which the company has no loss and no profit. This is a condition where the company makes a return on the investment it makes.
In more detail, in the book Managerial Accounting, Garrison and Noreen explain that BEP is achieved when the operational costs incurred by the company for the production process are covered by the income generated from product sales. That’s why it’s called the breakeven point.
Differences between BEP, PP, and ROI
Labamu memahami bahwa tidak semua pebisnis berangkat dari latar pendidikan ekonomi dan bisnis. Istilah BEP ini mungkin agak asing bagimu dan cukup sulit untuk membedakannya dengan Payback Period (PP) dan Return on Investment (ROI).
So, to avoid misinterpretation, here are the differences between the three:
- Break Even Point (BEP) is a condition where the amount of income (turnover) is equal to the amount of expenditure (investment) to run a business or project so that the break-even point is reached.
- Payback Period (PP) is a financial analysis used to calculate how long it takes for an investment to return on capital or get back the value of the investment that has been spent.
- Return on Investment (ROI) is a profit-loss ratio to calculate what percentage of profit will be generated from a number of investments issued to fund a business or project.
At this point, your Profit Friends can already differentiate between BEP, PP and ROI, right? After this, don’t get confused again, okay?
Benefits of BEP
BEP calculations are not just to “decorate” financial analysis. There are several important benefits why companies need to calculate it. Here are some of them.
1. Pricing Strategy
BEP analysis will help companies determine the best price to generate profits from a business perspective.
The reason is, through BEP you can get a comprehensive perspective on the cost structure for a product, starting from fixed costs, variable costs, to reasonable profit margins.
2. Understand Expenses
BEP analysis can also help you understand expenses, find “missing” expenses, and cut expenses that could be reduced. Of course, this is closely related to business profitability, your Profit Friend!
3. Determine goals
By projecting the BEP, you can solidify your goals to achieve them faster. This will really help you plan what needs to be done so that the break-even point can be reached quickly.
4. Estimating Funding Needs
Understanding the break-even point can help you estimate what type of funding is needed for your business to operate smoothly. Including estimating the amount of funds needed to achieve business goals.
5. Limit decisions based on emotions
Often business people rely on their instincts and emotions to make decisions. In fact, it requires careful calculations to support you in making the right decision.
One way is to carry out BEP analysis. This will give you a more logical perspective in making business decisions.
6. Basis for Decision Making
Break-even analysis is widely used in business decision making, such as when companies plan to create new products and services, expand operational areas, or increase production capacity.
This analysis helps you map out the pros and cons so you can make informed decisions about the activity.
7. Measuring Financial Performance
BEP analysis always appears and is used as an indicator in feasibility analysis reports. Its function is not just “just there” but to provide an overview of the results of measuring financial performance on investments made
How to Calculate BEP
BEP calculations can be done using two methods, namely BEP per unit (BEP in units) and BEP per sale (BEP in sales). There is no answer to the question of which calculation approach is better. Both are usually used together to complement each other.
The following is an explanation and how to calculate it. However, to make it easier to understand, Labamu will use the following illustration as an example.
Illustration
Mr Untung and Mrs Untung plan to open an MSME scale bread factory. After calculating the total fixed costs used to pay shop rent, permanent employee salaries and taxes, the total is IDR 450,000,000.
Meanwhile, the variable costs for purchasing cake ingredients and packaging are IDR 10,000 per unit. Seeing these numbers, Mrs. Untung suggested that Mr. Untung sell the cakes for IDR 25,000 per unit.
Approximately how much is the BEP?
1. BEP in Units method
The BEP per unit method (BEP in units) aims to find the answer to how much bread Mrs. Untung and Mr. Untung must sell in order to reach the break-even point.
We haven’t even discussed the advantages and disadvantages yet, your Profit Friend. To calculate it, the following formula is used:
BEP (in units) = Fixed Costs / (Price per Unit – Variable Costs per Unit)
BEP (in units) = IDR 450,000,000 / (IDR 25,000 – IDR 10,000)
= Rp450.000.000 / Rp15.000
= 30.000 unit
This means that Pak Untung and Bu Untung’s bakery will reach break-even after selling 30,000 pieces of bread.
2. BEP Method in Sales
Furthermore, BEP per sale (BEP in sales) aims to find out how much sales revenue must be obtained for a business to reach its break-even point. To calculate it, use the following formula:
BEP (in sales) = BEP (in units) x Selling Price per Unit
= 30.000 x Rp25.000
= Rp750.000.000
This means that the Pak Untung and Bu Untung bakery factory will reach the break-even point after achieving a sales turnover of IDR 750,000,000
v
- Reducing fixed costs. You can do this by moving to a shophouse where the rent is cheaper.
- Reducing variable costs. The way to do this is to lower the grade of butter from premium to super so you can get a cheaper price.
- Increase the selling price of bread per unit.
So, that was information about what BEP is and how to calculate it.
So that you don’t have a headache like Mr. Untung and Mrs. Untung who are busy calculating BEP, you have entrusted the management of your administration and business transactions to Labamu.
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