What is the Meaning of: Balance point | Concept and Definition of: Balance point
Balance, from the latin aequilibrĭum, is the State where two forces that are found / crossing compensate themselves and destroy each other. The balance is the harmony between various things and equanimity.
Balance point (also called break-even) is a finance concept that refers to the level of sales where the fixed and variable costs are covered. That said, the company, at its balance point, has a benefit which is equal to zero (it doesn't lose money, but it loses not either).
However, its balancing point, the company sometimes to cover its costs and expenses. If it increases its sales, it will be above the balance point and will get a positive benefit (or positive profitability). On the other hand, if its sales plummet from the point of balance, it can cause losses.
The estimation of the equilibrium point allows the company, before even to start its operations, to know what level of sales it needs to retrieve the money invested. In the event that it is unable to cover the costs, it will have to make changes until it finds a new equilibrium point.
To find its balance point, the company must know what are its costs. This calculation shall consider all disbursements (i.e., all the money leaving crates of the undertaking). Moreover, it must determine whether the costs are variable (those which vary depending on the level of activity) or fixed. The following approach is to find the unit variable cost, which is the result of the division between the number of units manufactured and sold units. Then it will be able to apply the formula for the equilibrium point, verify the results and analyze them.