A firm records its costs and revenue, because these figures allow it to calculate the level of profit or loss on its operations. However, almost as important as knowing the level of profit, is knowledge of the level of output required to make that profit. This knowledge will allow a firm to plan its production levels, and as a consequence will have knock on implications for marketing, HRM and finance departments.
When total costs are greater than total revenue the firm makes a loss.
When total costs are less than total revenue the firm will make a profit.
The point at which a business generates enough revenue to cover all of its costs without any surplus is known as the break-even point or break-even quantity. The firm knows that any units produced, and sold, beyond that point will represent a profit for the business. New firms and new products are unlikely to be profitable immediately as set-up costs tend to be high and revenues relatively low as the product is not well-known in the market place. In the early days after set-up, a new firm is likely to be making a loss. However, the business plan should identify a time at which it expects its revenues to match its revenues and it will break even.