Break-even is when the company’s total revenue is exactly equal to the sum of costs and expenses. It is calculated to know how much, in number of transactions or money, it is necessary to sell the service in order to pay for the operations without making a loss. It is noteworthy that the break-even point is not the goal of any company, but a reference, the objective is to make a profit. If the break-even point is exceeded by $1.00, it means that the company is profiting.
The accounting break-even point is the most used and the simplest. In it, the value of fixed costs and expenses is divided by the contribution margin. The result is the revenue needed to match spending. There are two variations of the accounting break-even point. At the financial break-even point, the only difference is that the depreciation of assets and other non-disbursable expenses are excluded from fixed costs. This is because some companies, in their annual balance sheets, include depreciation as a cost – for example, if they have an asset that was worth $100 and is now worth $70, the $30 lost enters the company’s list of costs or expenses.
At the point of financial balance, this difference is ignored, because all that matters are the expenses that represent an outlay of money from the company’s cash. The other variation is the economic equilibrium point, in which the opportunity cost is added to the sum. This is a monetary correction to be considered together with fixed expenses. The reasoning is as follows: if the entrepreneur did not invest in the company, he could invest his money in an investment that would yield, for example, 10% a year. The economic break-even point considers this margin, that is, you only “tie” when you pay the expenses and have a remuneration compatible with the percentage that the money would yield invested in the financial market.
To find the break-even result, you first need to ascertain two factors:
Fixed expenses that you will consider in the cost of keeping the company in operation, whatever its production. This includes renting the office or operating base; employee salary; water, electricity and gas; office supplies, hygiene and cleaning; cleaning, aircraft maintenance and security services. What is not included in this calculation are taxes on services and pilots’ commission. These costs will already be built into the service’s sales price.
The contribution margin is the gross gain on sales of services. In addition to being useful for finding the break-even point, it is often used to calculate the selling price of services. You add up the service costs and variable expenses and add the contribution margin value to the result. This surplus will serve, firstly, to pay the company’s fixed expenses and then the profit.
The most commonly used calculation to reach the break-even point is very simple. You will add up your business’ fixed expenses and divide them by the contribution margin. The formula is this: Break-even point = Fixed expenses / contribution margin
In the case of the financial equilibrium point, it is only necessary to disregard depreciation and other non-payable expenses when calculating the amount corresponding to fixed expenses. At the economic break-even point, you add a percentage to these expenses. For example, if the expenses are $50,000 in a year and you set the opportunity cost to 15% of that amount, the total fixed costs will be $57,500.
You saw that the break-even point is when revenues equal expenses and there is no profit, and that the contribution margin is the amount used to pay fixed expenses and profit, right? From there, it is possible to conclude that when the contribution margin is equal to the fixed expenses, the company is at its break-even point.
With this type of number in hand, the diagnosis will depend on the company’s particularities. If the break-even point or number of services needed is too high, an alternative is to change the contribution margin. But beware, because this implies a new sale price for the service.
If it decreases, the number of services required to break-even increases; if it increases, the service may lose competitiveness. Finally, there is still the possibility of tightening the belt and reducing the company’s fixed expenses.
Whatever the solution, the fact is that the first step towards the financial health of your aero agricultural company is to understand and apply the main control and monitoring tools.
Rafael Corrêa da Costa
Bachelor of Aeronautical Science
Post-graduate degree in operational safety
13 years experience as an executive and agricultural pilot. Ten years as an operational security manager for ANAC (Brazilian FAA).
Rafael has served as flight coordinator and air operations manager, in addition to acting as a pilot, and managing six agricultural aviation companies with aeronautical advice. He is currently CEO of Agrofly Sistemas.