For any company, the breakeven point or Break Even is a fundamental milestone that marks the beginning of profitability: it is the moment when the revenues generated by the company equal the total costs, indicating that the start-up has managed to find its way towards financial sustainability.

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In today's article, we'll explore the strategies and necessary steps that a start-up can take to reach this tipping point and ensure the continued growth and success of the project. The Break Even or balance point is a fundamental concept. It refers to the level of income, from sales, at which all expenses are covered (both fixed and variable) of them. And it is, therefore, a time when the company is not generating either losses or profits.Calculating and understanding the equilibrium point of a start-up is of vital importance: it allows us to set realistic goals and make informed strategic decisions. Knowing this point helps determine the sales volume needed to achieve profitability, which can guide pricing strategy, cost management and financial planning.

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Formula and components of the equilibrium point:

As we have already mentioned, the equilibrium point formula allows us to calculate the level of sales necessary to cover the company's costs and reach the point where a company generates neither losses nor profits.

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There are different formulas for finding what the equilibrium point of a company is, depending on whether what the company wants to know is what is the number of units sold (volume) that will allow them to cover all their costs or if what they want to know is what is the total value of income, in monetary units, necessary to reach Break Even.

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In any case, before you can calculate the Break Even or break-even point, you must know what both the company's fixed costs and its variable costs are.

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‍Calculation of the equilibrium point in volume of units

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Calculation of the equilibrium point in monetary units

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Calculating the break-even point can help evaluate different scenarios and make strategic decisions, such as adjusting the sales price, reducing fixed costs or increasing efficiency in variable costs, to achieve profitability more quickly. When analyzing the breakeven point, startups must consider two key components:

• Fixed costs: Like rent, salaries and general expenses, they don't vary with the level of production or sales. Therefore, they are costs necessary to maintain the operation of the company, regardless of the number of products or services sold. Although fixed costs remain constant, its relative impact on results decreases as sales increase.‍
• Variable costs: Like materials or direct labor, they are directly related to the volume of production or sales: as production or sales increase, variable costs also increase accordingly. Knowing the value of variable costs allows us to know How much does it cost to produce one more unit or provide an additional service.

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This implies that two companies with the same fixed cost, but with different margins, will not break even at the same time.By understanding the difference between fixed costs and variable costs, startups can make more informed decisions about the cost structure of their business: identifying opportunities to reduce unnecessary fixed costs, evaluating how variable costs affect their profitability, etc. In addition, understanding how these two components relate to the company's sales helps to establish adequate sales prices and to determine the level of activity necessary to reach the breakeven point.

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Importance of the break-even point for startups:

Understanding the break-even point allows startups to evaluate the viability and sustainability of their business model. By knowing the point at which revenues equal costs, startups can set clear and realistic financial objectives. This helps them avoid situations where they are constantly trading at a loss and allows them to adjust their strategy accordingly.

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In addition, the break-even point provides valuable information for making pricing decisions. By knowing the fixed and variable costs, as well as the breakeven point, startups can determine the optimal price of their products or services. This allows them to cover their costs and, at the same time, to be competitive in the market. In addition, the break-even point helps startups to make strategic decisions in terms of growth. By understanding the level of sales needed to break even, startups can evaluate whether their current strategy is sufficient to achieve profitability or if they should consider options such as increasing operational efficiency, expanding their target market, or diversifying their product line.

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Strategies for achieving the balance point:

As we have seen when analyzing the different equilibrium point formulas, the time factor is not taken into account for their calculation. However, time is a valuable resource in the business world and can significantly affect a start-up's profitability. It is possible for a company to break even quickly, which would indicate efficient management and solid demand for its products or services. Whereas if a start-up takes too long to break even, it may have to face financial difficulties and cash shortages. Therefore, when calculating the breakeven point, it is essential to take into account the time needed to reach it and to make strategic decisions that accelerate the process if necessary, such as:

• Optimize fixed costs: Looking closely at fixed costs and looking for opportunities to reduce them or make them more efficient can make a big difference at the breakeven point. This involves renegotiating leases, looking for cheaper suppliers, reviewing overhead costs, and evaluating the possibility of outsourcing certain functions or processes.‍
• Improve operational efficiency: Identifying and eliminating inefficiencies in operational processes can help reduce costs and accelerate the achievement of the break-even point. This involves implementing more efficient supply chain management practices, optimizing production times, improving inventory management, and looking for ways to automate repetitive tasks.‍
• Increase sales volume: Increasing sales is a direct strategy to reach breakeven faster. Startups can explore tactics such as expanding their target market, launching effective marketing campaigns, establishing strategic alliances with business partners, improving customer experience, and developing customer retention strategies to encourage repeat purchases.‍
• Adjust prices: Reviewing and strategically adjusting sales prices can influence the time needed to break even. Startups may consider increasing their prices based on the value proposition, carrying out selective promotions and discounts to stimulate demand, or exploring flexible pricing models, such as subscriptions or complementary sales.

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It is important to keep in mind that each strategy must be evaluated and adapted to the particular situation of each start-up. There is no one-size-fits-all solution, so analysis and testing are essential to determine which approach is most effective.

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By implementing these strategies, startups can accelerate their progress toward breakeven and achieve earlier profitability. However, it is crucial to maintain a balance between the search for profitability and sustainable growth, ensuring that the actions taken are consistent with the company's long-term vision.

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Although reaching the break-even point is a crucial milestone, it doesn't automatically guarantee continued and sustainable growth in the future. It is possible for a start-up to break even in a certain period of time, but if it does not continue to innovate, adapt to the market and improve its products or services, it risks stagnating or even regressing. Therefore, it is essential that startups not only focus on reaching the break-even point, but also on develop long-term strategies to remain competitive and achieve consistent growth.

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