Investing in Philippines: Accounting 101: Some thoughts on Break Even

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Saturday, May 1, 2010

Accounting 101: Some thoughts on Break Even

The term is use to signify something about a business's Profit & Loss(click here to know more about Profit & Loss).

Break even is that level in which a business's, for example a karinderia, profit is just equal to its expenses. When I say profit that means selling price minus the cost of the thing you sold and by expenses I mean the cash out for expenses to run the karinderia like rent, salary of your cook and washer(if you hire one), cost of gas, electricity, and other expenses that you have to pay for to run your business.

Why is this important?This one is important when you are running a business because this will be the number that will tell you of you are earning or just losing in running the business. In simple terms you must surpass this amount in order to say that your business is an earning business.

In order to get an idea for this number or figure one must make an accurate assumption of what will your business sell and expend for a considerable span of time. In our case, the karenderia operates on a daily basis and its best to get a daily break even point to determine if it is worthed to stay in the karenderia business. 

The formula to get this number is shown below:

Break even = Operating cost divided by Contribution margin

Where:

Operating cost is your total expenses to operate the business
Contribution Margin is the percentage of profit on top of your item sold
                    which is (Sales - cost of item sold) divided by Sales

For example if your karenderia needs Php 5,500 to operate selling a complete meal(that is one meat, one veggies, rice, drink and dessert) at Php 50.00 of which the total cost per meal is Php 35.00 it must make more than Php 18,300.00 a day to really say that it has recovered its expenses and made a profit.

Now why am I writing about this in a blog about investing? One is that investing is not limited to stocks alone and another it is nice to know if the company you are planning to invest at is making by looking at their Profit and loss statement. Again before you dive into the investing bandwagon know what you are going into, only invest your excess, learn and always don't be shy to ask because its your hard earn money you are handing over to the broker.   

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