Breakeven Analysis

breakeven analysisAccording to Webster’s Dictionary, the breakeven point is defined as “the point at which cost and income are equal and there is neither profit nor loss“.  The purpose of breakeven analysis is to determine the point at which revenue received equals the costs associated with receiving the revenue.  Simply put, how much revenue we need to earn to cover our costs.

Breakeven Analysis

Situations that call for a breakeven analysis can include:

Start-Ups and New Ventures

The most common use of breakeven analysis is when considering starting a new business or whether to develop a new product or service.  The limitation of breakeven analysis for a new venture is that it doesn’t take into account how demand may be affected at different price levels.

Breakeven Analysis in Pricing

As outlined above, most companies perform a breakeven analysis when rolling out a new product or service.  However, it’s important to periodically revisit the analysis to determine whether conditions have changed.  For example, if demand for a product has increased, then it may be possible to reach the breakeven point sooner if the price of the product is increased.

In Times of Trouble…

When business is booming, it’s easy to lose control of costs. This is because the volume of sales is more than enough to cover them.  When things start to head south, revisit your breakeven analysis to ensure that prices are set correctly. Only direct resources towards profitable sales.  Calculating the breakeven point by product, customer, or region can help highlight areas where you can make improvements.  Often, it’s possible to convert some fixed costs to variable costs in order to keep costs in line with volume.

To learn how to prepare a breakeven analysis, check out this article on wikicfo. If you also want to learn how to price for profit, then download our Pricing for Profit Inspection Guide.

breakeven analysis

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One Response to Breakeven Analysis

  1. Werner Reisacher April 23, 2015 at 12:11 pm #

    Break-even point analysis are great tools However not in the hands of Sales and Marketing people. Sales prices are dictated by the market. And that is where they have to focus their analysis on.
    Safeguarding the Assets of a company, identifying potential liabilities in a timely manner, and running a company at optimal costs and profitability is the prime responsibility of every Executive. These goals can only be achieved if each of the elements in the equation is dealt with in an optimal way. There is not reason why sales prices should be lowered just because manufacturing has been able to reduce costs.
    The only way achieve optimal results is by breaking the operation down into individual processes. In case of a complex manufacturing entity, activity based costing is a must. Analysis the reasons why days of sales of outstanding receivables are increasing is not solved by adding additional collectors. Look at the ratio between invoices versus credit notes and you will often find the culprit. Wrong billing information, errors in invoicing, or long time overdue account reconciliations are more often than not to be blamed.

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