An important aspect of running a business is to be able to know and understand the minimum business that one needs to do to keep the business afloat. This point is the one at which the business income is just enough to meet its expenses. A point at which the income equals the expenses and is therefore called the Break even point. For example if the monthly expenses of a business are Rs 50,000/- then the minimum income it needs to generate to be able to meet the expenses is Rs 50,000/-. Therefor Rs 50,000 will be the BEP for the business.

A businessman would be lost if he is unaware of the minimum business that he needs to conduct so that he is able to meet his obligations in terms of expenses. If a vendor is asking for a price increase or a customer is asking for a discount or an increase in wages and salaries is due, then under all these circumstances, while there would certainly be an impact on profits, even the BEP is likely to shift. A businessman must know if he is in a position to bear the shift, so that he could take appropriate decisions, in the interest of the organization.

In case a business is under-loaded, the concept of BEP comes as a handy tool to decide if there is any scope of looking at increasing the business at lower margins, etc.

The main advantage of using such a tool is that the businessman can drive the business and not just accept the outcome as an ‘act of god’.

Even Point = Fixed Costs / Contribution Ratio

Equally important is the concept of Margin of Safety. It is a number which indicates the amount of margin available to a business. If the actual sales figures of a business are Rs 75,000 and while its BEP is Rs 50,000, it means that even if the business falls by Rs 25,000, the company need not worry, as it would still be able to meet its expenses. Margin of safety allows an owner to know, how much ‘margin’ or ‘play’ is available to the business at any given point of time.

Margin of Safety = Actual Sales – Break Even Sales