Every business conducts certain activities that end up either profitable to the business or cause loss to the business. The management should keep track of the activities being conducted by the business and also the impact which these activities have on the working of the business. If the loss caused is very high and irrecoverable, the analysis will allow us to stop the activity before it is too late.
One of the best ways to understand and determine the business’s profit or loss is to conduct a Break-Even Analysis. This technique helps the management to set targets which will allow the business to understand how many levels of profitability needs to be achieved so that the business achieves a position of no profit no loss. Proper Business Planning is required to understand the breakeven point of the business.
Let us have a deeper understanding of what Break-Even Analysis is.
Break-Even Analysis: Definition
Break-Even Analysis is a business tool which is used by almost all the businesses to understand the performance of the company and also to have an understanding of the present financial condition of the company. It forms a very important aspect for a business plan as everyone related to the business will like to have an understanding of how much work needs to be done just to be at a position of no profit and no loss.
Break-Even point of a business is a point in which the revenue received by the business is equal to the total costs incurred by the management.
Break-Even Point = Fixed Costs / (Unit Selling Price – Variable Costs)
- Here the Fixed Costs for the business are all the utilities, the insurance, the wages to the employees, the rent of the building, etc. One thing to remember is that Fixed Costs remain the same no matter the changes in the units produced by the business.
- Unit Selling Price is the price of one unit at which it is sold in the market.
- Variable Costs are the cost which is directly affected by the number of units produced by the company. Here these are the labour used and the materials available for use.
Benefits of Using Break-Even Analysis
There are many benefits to conducting a Break-Even Analysis of the company. Here we will focus on four major benefits for the business. They are:
1.Provides Information to the Management and investors
Finding and monitoring the Break-Even Analysis will provide both the management and investors, both present and potential, the data according to which they can make the informed decision of investing in the company. It will also allow the management to understand which business activity they should focus upon.
2.Helps in setting goals for the future
With the necessary data available due to the Break-Even Analysis, the management will be able to set goals for the future. As the Break-Even Analysis will help in understanding the if the revenue from the various business activities and the costs incurred are at a balance or not, the management will update the goals as a particular milestone is reached.
3.Allows Controlling and Monitoring the costs
If the revenue from the business and the costs incurred by the business are not in a balance or if the financial condition of the business is not shoeing profit, then the management needs to takes certain concrete steps which will change this situation for the betterment of the business. This discrepancy between the revenue and the costs can easily be calculated by conducting a Break-Even Analysis.
4.Assists in Planning ahead and deciding the Pricing Strategy
A business will add new machinery or services to its roster, and this move will create an effect on the business. The positivity or the negativity of the move can be understood and calculated by conducting a Break-Even Analysis. It will also help the managers to understand the measure the impact of change in the prices of the products or service.
Calculating the Break-Even point is a very simple yet efficient thing to do, as long as it is done correctly. This is why it is always recommended that you should take professional assistance which conducting the Break-Even Analysis of your company.
Looking or trustworthy and efficient financial analysts in the United Arab Emirates, you can try JAXA Chartered Accountants’ services. The Experts at JAXA will not only assist you in conducting the Break-Even Analysis but will also provide various other services such as Accounting, Auditing, Vat and Tax related services. For more details, Contact Us. We will be happy to help you.