Break even analysis
What is the break even analysis?
Break even analysis is an analytic process that determines the point where the costs of producing revenue (expenses, and certain liabilities) equal the revenue raised by the product. In other words the product or business has not made a profit or loss. This is a very useful tool in deciding how well the business is doing and weather it will be a good investment.
What is the break even analysis like?
The break even analysis is like a see-saw at the local park. When two people of equal weight sit on a see-saw and do not exert any downward pressure the remains flat, however if there is someone with a larger mass at one end the see saw will bias to that end. In a break even analysis when both the costs and the revenue is the same the business will be balanced and not bias towards profit or a loss
What Is the purpose of the break even analysis?
The break even analysis is there to provide business owners and analysts with information about how close ( or far) the business is away from being cost neutral or even making a profit. This is valuable information especially when deciding if it is worth investing more money into equipment or new products.
What is involved in a break even analysis?
a break even analysis is a simple formula, the only thing that is required in doing a break even analysis is either an estimation of how much it will cost to produce the product or the expenses from the last production run to feed into the formula.
The ratio used for a break even analysis is as follows:
(Operating expenses + annual debt service)/ gross profit margin = break even sales
In other words before you attempt to work out where you are breaking even you need to know your operating expenses, annual debt service, and your gross profit margin. Otherwise it is a simple matter of feeding the data that you have into the formula to receive the monetary figure of how many sales you need to obtain before you are cost neutral.
How does conducting a break-even analysis impact of different areas of the business?
The results of a break even analysis affects multiple parts of the business, from management right down to the average worker. If a company is not breaking even management may endeavour to fix this by either promoting sales through better trained workers or promotions. Or by cutting costs so they have less operating expenses when delivering a product or service.
What terms are used when conducting a break even analysis?
- Fixed costs Costs that are not associated with the output of the business ( e.g. Rent)
- Variable costs Costs that go up and down with the business product output ( e.g. machinery, wages, delivery costs)
- Break-even point the point at which the business is not making a profit or a loss
- Profit the business is earning more money than it is spending
- Loss the business is spending more money than it is earning.
Where can I find out more about break even analysis?
Who would benefit most from this information?
- This information is suited to people with either no experience in this topic or have some experience but wish to extend their knowledge.
- In the workplace this information would best suit team leaders and senior managers due to the fact that they make decisions regarding the business.
- This information is not covered by any jurisdiction as it is a way that a business owner may choose to improve their business
- This information is not have any cultural influence surrounding it
- The economic climate may affect this information in the sense that if the economy is in a resection or is growing out of proportion it may be harder or easier (depending on circumstances) to gain the desired results.
- Small to medium enterprises will benefit from this because they are more likely than not to analyse their own data instead of hiring an accountant or financial advisor to do it for them.
- This information can be applied to all industries.