Let’s discuss the most important concept in business. That concept is the break-even point. This is the point where you break even. To explain this further. The break-even point is the point where revenues exactly equal expenses. There is no profit. There is no loss.
Why is this important? We want to run a business at a profit. We can’t afford to run a business at a loss. At a very minimum a business needs to pay for itself. The business needs to break even plus provide a profit for the owners.
Once you figure out your break-even point, then you can determine how much revenue is needed to earn the desired profit.
Under example one, Dunder Mifflin has achieved the break-even point. Their revenue exactly equals their expenses. Thus they are at their break-even point.
Now that we know the break-even point we can then determine revenues needed to earn a profit. So let’s say the owners of the company want to earn a profit of $500. Then we just simply do some easy math and we determine that revenues need to be $1,500 in order to have a profit of $500.
But let’s not forget that we live in America and Uncle Sam wants his cut. Therefore we have to figure out what the cost of taxes will be. In our example, Dunder Mifflin will be in the 25% tax bracket.
Now we have a true representation of how much revenues must be earned in order for the owners to have a profit of $500. Without calculating the break-even point and the taxes due, the owners would underestimate the actual revenue needed in order earn their desired profit of $500.