In the business world for freelancers, understanding the concept of the break-even point is necessary for solid and profitable financial management. Often, it is seen as the tipping point where the threshold between losses and profits is marked.

Understanding how to calculate the break-even point goes beyond just balancing the books. Especially for freelancers operating in highly competitive and dynamic environments.

For this reason, our goal is to provide you with a complete overview of the break-even point. From its definition and importance to the formulas you can use to calculate it.

Breakeven point: An essential guide for the self-employed

What is the break-even point for a business?

It is defined as the level or volume of sales at which total revenues equal total costs, so that the company neither makes nor loses money. In your case as a freelancer, this means the point where your income exactly covers all expenses, both fixed and variable.

It is a crucial tool that provides a solid foundation for financial planning in managing your freelance business, telling you what you need to know to avoid losses.

Importance of the Break-Even Point

The break-even point is crucial because it leads you to conclude whether a venture is financially viable for you or not.

With this information, you can set appropriate prices, plan more effective marketing strategies, and manage your finances much better. Similarly, it serves to detect potential problems and solve them.

As a result, outcomes will be more favorable, contributing to increasingly positive customer testimonials.

Moreover, the break-even point also helps you evaluate your projects or services, for example, deciding which ones are more profitable and require investment.

Thus, understanding and calculating the break-even point becomes an essential task for making informed decisions. It is what drives the success of a freelance business in the long term.

How is the business break-even point calculated?

To calculate the break-even point, you first need to be aware of the company's fixed and variable costs, which can be compiled on a monthly, quarterly, or annual basis.

For this calculation, a general formula is applied using the gross margin percentage.

Break-even point formula:

Break-even point = (costs) / (gross margin percentage)

You can choose to do the calculations manually or use an online calculator.

But this general form is not the only one, there are other variables that can work for you to estimate the break-even point.

Formulas that allow you to calculate the break-even point

Determining the break-even point is a straightforward process, but first, you must understand some concepts.

• Fixed costs. These are the constant expenses present in a business, such as rent for premises, employee salaries, insurance, etc.

• Unit selling price. This is the value determined for each service offered or product to be sold.

• Unit variable cost. This is the amount that varies depending on the level of production or sales. For example, the cost of materials or the price of direct labor.

Keeping these factors in mind, the break-even point can be calculated through formulas.

Break-even point formula

Break-even point = fixed costs / (unit selling price - unit variable cost).

This type of formula seeks to determine the contribution margin, which is the disparity between the volume of sales and variable costs.

In other words, it represents the profits that a company generates once variable costs are covered, without considering fixed costs.

Suppose your company sells a product for 500 MXN, the unit variable cost is 250 MXN, and fixed costs total 50,000 MXN.

The calculation would be as follows:

Unit break-even point = 50,000 / (500 - 250) = 200

This means that, to reach the unit break-even point, your independent business needs to sell 200 products.

Break-even point in units

Unit variable point = unit variable price / units sold

This formula allows determining the moment when your business's revenues are enough to cover fixed and variable expenses.

Now you know how to calculate the break-even point.

This tool is as fundamental as creating a logo and defining your personal brand. So, start calculating your financial break-even point and evaluate the profitability of your freelance business.

You can do this using templates for ease.

What to do when reaching the break-even point?

When an independent company reaches its break-even point, it can opt for several actions:

• Continue operating. The business is being able to cover all expenses, which may be enough for situations of uncertainty or a transition.

• Seek growth. You might aspire to gradual growth. This includes exploring opportunities to increase your customer base or diversify the services offered. Of course, always maintaining your business values and a reasonable approach to avoid excessive financial risks.

• Optimize costs. Generally, as a freelancer, you have direct control over your expenses, so you might focus on optimizing them. Whether by seeking various ways to reduce operating expenses or offering better rates to improve profitability.

• Invest in personal or professional development. If your business has reached its break-even point, it wouldn't be bad to consider investing in yourself. This can involve learning new skills, participating in training programs, or allocating money to tools and resources that improve the quality of your service.

The break-even point can be used as a starting point for making strategic decisions that lead to profitable and sustainable growth.

Conclusion

Applying the concept of the break-even point can aid in the success of any freelancer with a business. From setting appropriate prices to planning the growth of their company in the long term and sustainably.

It's worth noting that tools like DolarApp can be your ally on your business journey. With features that simplify financial management, as well as foreign currency conversion.

If you master what the break-even point is and take advantage of the functions of DolarApp, you will be better equipped to face financial challenges and build a prosperous business.