Definition: Break-even time represents the amount of time it takes for an investment to make back its original cost. It’s calculated by using a prevent value table to measure the number of days the net cash flows from the investment will equal the original cost of the investment.
You might think of this as some kind of stock investment calculation, but it is used by businesses for any type of venture—not just investments in the market. Break-even time really a calculation of the acceptability of an investment in general. The investment could be in anything.
Take a manufacturer for example. Manufacturers don’t typically invest money into the stock market. Instead, they put all of their capital into asset and plant expansions. When looking at purchasing a new piece of equipment, management wants to know how long it will take for the company to make enough money off the machine to pay for the machine. Obviously, a lower BET represents a better purchase.
Retailers, on the other hand, don’t typically spend large amounts of money on equipment. In fact, most retailers don’t even own their own building. They usually rent a storefront in a plaza or mall. Retailers do however invest their money in leasehold improvements and store build outs to attract more customers. This is just as an important investment as a manufacturer purchasing new equipment. The retail management must know how long it will take the new store improvements to earn back their cost.
What Does Break Even Time Mean?
This break even calculation is important for cash flow purposes as well. Management must estimate the amount of cash coming in from the investment in order to make loan payments and other fees associated with the purchase.