Accounting 101: Some thoughts on Break Even

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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.   

How much do you have now?

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One question you may ask me "I don't have any money, how can I invest?"

The people today has this mentality problem. People's purchasing power is  reduced to their salary and that they have been practicing what most call "Scarcity Mentality". In simple language people believed they cannot buy or acquire things or afford things because they think they don't have anything and that they look at what they have right now as very small. There is a bad effect of Scarcity Mentality. Whenever there is a sale or there is free item that goes with the item they wanted to buy they jump on to purchase it thinking that they got a good deal. The tendency on this is that one becomes an impulsive buyer. There is nothing wrong in searching or buying specially when it is on sale only that this becomes a habit. One may think that when there is a sale he or she must buy. Wise buying is not always buying because it is on sale; in the end one ends to be broke and from there one may brand themselves as poor and thus your mind programs you that you don't have any money to invest.

Number one rule in investing is investigate. Never ever jump into something that you don't know. Today's world has many means of getting information. We have the internet and print media to learn about where to best put our money. Second is invest only your excess. Many people end up losing all they have because they have invested all they have on stocks then suddenly lost everything due to financial crisis. Always only invest your excess.

So the question still stands, how much do you have right now? Many people think that you need a lot of money to invest in stocks but that is not correct. If you look around and check the newspapers or the investment news channels like CNBC you will notice that stocks are in the range of less than a dollar or peso to hundreds or thousands. With this in mind one can buy stocks base on how that particular market's rules. Some are sold in board lot just like in the Philippine Stock exchange where board lots ranges from 10 - 1000 depending on the trading value. So for example a stock trading at Php 50.00 may have a board lot of 100 making the total required investment to be around Php 5,000.00 only. Off course you have to open an account with a broker which requires a deposit of around Php 25,000.00 and up depending on what acount you are opening.

With that in mind you can see how much you are saving. I know you will say I don't even have left after I pay my bills. The problem with us is that we contend ourselves with whatever is left on our salary, we our satisfy first bills rather than satisfying pocket. I suggest you do the reverse. It seems impossible but when there is a will there is a way. 

In order to do this one must first look at his spending habits. One must segregate what are needs and wants. By doing this one can identify which should be given priority. Do this on a daily basis. Everytime you pull your wallet to make a purchase think if it is a need or want. In the process you will be able to control how you spend on the need or want. Master this until it comes to the point that you will not spend for wants anymore and from there you can start building your savings. Make a note on your savings. Writing your savings entices you to save more. Then after making a considerable savings ask yourself again if how much do you have now. Remember the amounts a I gave you  that is Php 25,000.00 and the stock value ranges of Php 1.00 - 50.00. From here you can visualize how near you are and that you have a money to invest in stocks or any other investment