5 benifits of break even analysis for financial managers.
Answers
Explanation:
Benefits:
The following are the benefits out of break-even analysis:
1. Make or buy decision:
The C-V-P analysis assists in making a choice between two courses of action to make versus to buy. If the variable cost is less than the price that has to be paid to an outside supplier, it may be better to manufacture than to buy.
2. Production planning;
The C-V-P analysis helps in planning the production of items giving maximum contribution towards profit and fixed costs.
3. Cost control:
As a cost control device, the C-V-P analysis can be used to detect insidious upward creep of costs that might otherwise go down.
4. Financial structure:
Break-even analysis provides an understanding of the behaviour of profits in relation to output. This understanding is significant in planning the financial structure of a company.
5. Conditions of uncertainty:
When some reasonable basis for subjective extrapolation is available, the breakeven analysis provides the financial management with information helpful in its decision-making activities.
Answer:
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What is break-even analysis?
A break-even analysis is a useful tool for determining at what point your company, or a new product or service, will be profitable. Put another way, it’s a financial calculation used to determine the number of products or services you need to sell to at least cover your costs. When you’ve broken even, you are neither losing money nor making money, but all your costs have been covered.
For example, a break-even analysis could help you determine how many cell phone cases you need to sell to cover your warehousing costs. Or how many hours of service you need to sell to pay for your office space. Anything you sell beyond your break-even point will add profit.
>>>There are a few definitions you need to know in order to understand break-even analysis.
- Fixed Costs: Expenses that stay the same no matter how much you sell.
- Variable Costs: Expenses that fluctuate up and down with sales.
➡There are many benefits to doing a break-even analysis.
Price smarter
Finding your break-even point will help you price your products better. A lot of psychology goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.
Cover fixed costs
When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.
Catch missing expenses
It’s easy to forget about expenses when you’re thinking through a small business idea. When you do a break-even analysis you have to lay out all your financial commitments to figure out your break-even point. This will limit the number of surprises down the road.
Set revenue targets
After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set more concrete sales goals for you and your team. When you have a clear number in mind, it will be much easier to follow through.
Make smarter decisions
Entrepreneurs often make business decisions based on emotion. If they feel good about a new venture, they go for it. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.
Limit financial strain
Doing a break-even analysis helps mitigate risk by showing you when to avoid a business idea. It will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes.
Fund your business
A break-even analysis is a key component of any business plan . It’s usually a requirement if you want to take on investors or other debt to fund your business. You have to prove your plan is viable. More than that, if the analysis looks good, you will be more comfortable taking on the burden of financing.