Tag Archives | break even

Prepare a Break Even Analysis

See Also:
Contribution Margin
Cost Volume Profit Model
How to Prepare an Investor Package
ProForma Financial Statements
Net Profit Margin Analysis
Comparison Analysis

Break Even Analysis Definition

The break even analysis definition is the studying the path to the point where a company is neither losing money nor making a profit. It is very important to the survival of any start-up business. You can perform it for either products or the business as a whole. Reference the break even expenses as either pro or post-forma – that is before or after the company has been formed.

Break Even Analysis Explanation

The break even analysis serves to provide the company with a very important piece of information: “How much revenue does the firm need to make in order to break even?”

This break even analysis is quite easy to do. The only critical piece of information that you will need to attain is a breakdown of the your firm’s expenses into Fixed Expenses and Variable Expenses.

Once you have a breakdown of fixed costs and variable costs, input these costs into the template. You will also be able to conduct various “What if” scenario analyses to see how the breakeven revenue will change.

Once you are able to arrive at the break even analysis, you can show the Owner(s)/Management this metric and make it part of their sales planning. Another idea might be to incorporate this metric into the Flash Report review meeting. This way your staff can know on a weekly basis if they are on track to at least breaking even.


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Break Even Formula

Use the following break even formula:

Break Even Point: Total Revenue = Total Costs

Prepare a Break Even Analysis

Let’s look at how to prepare a break even analysis.

Accumulate Expense Information

In order to successfully prepare a break even analysis, you need to gather and/or create the following financial information: Current Monthly Fixed Expenses (Dollar Basis), Current Monthly Variable Costs (as a Percentage of Revenue) and any “What if” scenario changes that you would like to consider. Note: This is optional depending on whether or not you would like to conduct a sensitivity analysis.

Depending on the robustness of your financial system, you may or may not have some of the above inputs. As such, it may be necessary to first create them prior to working on the break even analysis.

Once the initial break even analysis has been done, it will just be a question of maintaining it by inputting the most recent financial information. This maintenance can be done on either a monthly or quarterly basis. The CFO/controller should set it up. Another consideration would be to “outsource” the task to a consultant. Once you get the expense info, you will need to separate the list into a Fixed Expense portion and a Variable Expense portion.

Also, as part of your break even analysis, you may want to discuss any “What if” scenarios with the Owner(s)/Management. They will be able to provide any direction you need with regards to changes in expenses going forward.

Input Expense Information/Scenario Analysis

Once the initial break even analysis is done, you can also input alternative scenarios under the “$ Change” OR “% Change” columns. Do not input data into both columns as the program will sum up both together.

Once you have gathered and/or organized all the expenses into either the Fixed or Variable group, it will now be time to enter the appropriate data into the template.

Fixed Expenses

List each type of fixed expense under the “General and Admin/ Fixed Expenses” header. You can usually get this information off of your income statement.

NOTE: Express fixed expenses in dollars. Input the dollar value of each fixed expense item under the “Base” heading.

Variable Expenses

List each type of variable expenses will be entered under the “Variable Costs” header. You can usually get this information off of your income statement.

NOTE: Variable expenses are expressed in terms of percentage of revenue. Input each variable expense item as a percentage of total revenue under the “Base” heading.

Scenario Analysis

Once the initial breakeven analysis is done, you can also input alternative scenarios under the “$ Change” OR “% Change” columns. Do not input data into both columns as the program will sum up both together.

Fixed Expenses

Input your changes in the areas highlighted EITHER in yellow or aquamarine. DO NOT enter changes in both columns as the program will sum up both columns.

Variable Expenses

Input your changes in the yellow highlighted area only.

The program will calculate the contribution margin and the sales necessary to achieve breakeven status. Please note that this break even analysis assumes a single/composite product line. You may want to use a more sophisticated approach to ascertain the break even point for a mixed product group.

Maintain Monthly/Quarterly

Once the break even analysis has been done, it will be very easy to update it. Line items on the income statement usually don’t change. However, it may be worth double-checking to make sure that no additional expense line items have been made. Having done so, it will simply be a matter of updating the figures for the expense line items.

Once you have set up the initial break even analysis template, it will just be a question of maintaining it by inputing the most recent financial information.  You can do this maintenance either on a monthly or quarterly basis.

Break Even Analysis Example

For example, Sly is considering starting a new business. Sly, an experienced business person and professional in his field of expertise, knows that proper planning is essential to consistent company profits. He wants to see that his company can survive before he creates it.

Break Even Calculator

Sly initially scours the internet for the keyword “break even calculator”. Unsatisfied with the result, Sly really wants to get his hands dirty. He decides to perform his own break even calculation on paper before he creates financial models.

Estimates

First, Sly estimates total revenue. He thinks about all of the products and services he would provide which create income. Now that he knows these he thinks about what he could sell them for. He does a little competitive research to find the standard market price for his products. Sly settles on this as a good point to begin his assumptions. He considers his products in reference to how many he can sell a year and decides he will be calculating break even points for each year.

Then, Sly estimates total cost. He thinks about the resources needed to conduct business. Add overhead, cost of goods sold, salaries, and other factors. Once again Sly assumes the cost of these based on what he sees as the average cost of these resources in the market. He adds these together in regard to each year.

Sly now has his total revenue and total cost per year. Though these are estimations, he is satisfied with this acceptable starting point. He moves on to subtract these total costs from his total revenues. Sly finds that he actually stands to loose, not gain, money from the business idea he is currently studying. Sly considers scraping his idea but decides to keep his notes and look deeper into the model. Though he has not found the results he is looking for, he is pleased to have performed a proforma break even analysis. In his current situation it is much worse than performing a post-forma break even analysis.

Break Even Analysis Template

A break even analysis template can be found at: S.C.O.R.E. Template Gallery.

If you want to find out more about how you could utilize your unit economics to add more value, then click here to download the Know Your Economics Worksheet.

Prepare a Break Even Analysis, Break Even Analysis Definition

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Cost Volume Profit Formula

See Also:
Cost-Volume-Profit (CVP) Model

Cost Volume Profit Formula: Breakeven Sales Volume

Breakeven Sales Volume = Fixed Costs ÷ (Sales Price – Variable Costs)

Breakeven Sales Volume = Fixed Costs ÷ (Contribution Margin)

6,000 = $30,000 ÷ ($7 – $2)

6,000 = $30,000 ÷ ($5)

As you can see, the theater has a contribution margin of $5. That is, the theater makes five dollars per ticket sold. This contribution margin can be used to pay down the theater’s fixed costs. So we divide $30,000 of fixed costs by $5 contribution margin. This shows us that the theater must sell 6,000 tickets per quarter to break even. The cost volume profit equation shows us many important aspects of the business of the theater.

Now let’s say the theater doesn’t want to merely breakeven. They actually want to make a profit in the upcoming quarter. Selling 6,000 tickets allows them to breakeven. But how many do they need to sell in order to make a profit of, let’s say, $10,000? We can find out by using the CVP model and the CVP formula.

When performing CVP analysis in order to determine the sales volume required for a set target profit, you simply add the target profit to the fixed costs. So we have variable costs of $2, sales price of $7, and fixed costs of $30,000. And now we’re adding target profit of $10,000. Following is how we set up the CVP formula for a target profit.


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Cost Volume Profit Calculation: Target Sales Volume

Target Sales Volume = (Fixed Costs + Target Profit) ÷ (Sales Price – Variable Costs)

Target Sales Volume = (Fixed Costs + Target Profit) ÷ (Contribution Margin)

8,000 = ($30,000 + $10,000) ÷ ($7 – $2)

8,000 = ($40,000) ÷ ($5)

As you see here, the theater must sell 8,000 tickets in order to cover its fixed costs and make a profit of $10,000 in the upcoming quarter.

Of course, for illustrative purposes, this is a very simple example. Real-world examples may be more complex and have more variables. But this is a basic version of the cost-volume-profit financial model.

cost volume profit formula

cost volume profit formula

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Cost Recovery

See Also:
Disaster Planning for IT
Modified Accelerated Cost Recovery System (MACRS)
Cost Recovery Method
Payment Terms
Business Drivers

Cost Recovery Definition

Cost recovery, defined as the method to recovering an expenditure which a business takes on, is both a specific and general term. Generally, cost recovery is simply recovering the costs of any given expense. This can be the initial startup costs of the business by meeting and exceeding the break even point, the cost of an investment through evaluating the return on investment, or even the cost of capital taken to finance the firm. Specifically, the cost recovery method of accounting gains back the cost of an investment by relying on the certified depreciation schedule of the item.

Cost Recovery Explanation

Cost recovery, explained simply as regaining the value of an expense, is an important concept for accountants and company founders alike. Each of these parties are interested in cost recovery solutions.

Cost Recovery Methods

For entrepreneurs, cost recovery methods are an important concept. Founders of a company are interested in evaluating and optimizing the benefit of their effort, especially their capital. Without moving too extensively into the subject, start by evaluating the return on investment of anything: the business as a whole, a piece of equipment, even a hired employee. Even more, an entrepreneur is truly interested in return on equity; explained simply as the return on their investment interest. This differs from return on investment which measures the return on the entire investment.

Cost Recovery Accounting

For accountants, cost recovery accounting means gaining back the value of an expense. Accountants do this mainly through depreciation; using depreciation tax law to minimize the taxes paid, thus increasing final profit for the firm. These accountants study tax law to find the rules which result in the greatest benefit for their employer. Ultimately, a tax law expert will be the best at achieving this goal.

Cost Recovery Example

Dee is a tax accountant for a fortune 500 company. Unlike where many accountants deal with the everyday expenses, projects, and various operations of of the business, she does not. Dee has one focus: optimizing cost recovery deductions by minimizing the tax expense of her company. She is a tax accountant and loves to save her firm money.

Now, Dee is working on the cost recovery model of depreciation. She understands the laws well and follows a strict system to assure that she is processing company records properly. Dee is a creature of habit.

At a networking event, Dee heard about a tax law change that just happened this month. Even though she has done a great job so far, she wants to use this to make even more profit for her employer. After the event, she rushes back to work to see what value she can create.

Example Conclusion

Dee finds that she can save the company $1,000,000. If she had not heard of the recent change, this large sum of money would have been lost. These kind of thing happens all the time. Tax law generally stays the same but often a small change occurs to the statute. In this case, the small change caused big results for Dee and the business she works at.

After saving the company, Dee receives a big promotion and raise. In her field, she is an expert. Though a creature of habit, Dee can change when she needs to. She has shown it through this achievement. As she moves forward, Dee will continue to keep track of tax law to make sure she can do the best job possible.

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