Break Even Point Analysis

This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.

How To Calculate The Break Even Point

When I set the example (link), I didn’t need to calculate lots of different numbers to find the break even point.

There is a simple formula provided you know details about the fixed costs and the contribution. [continue reading…]

After the last module What Is Profit,   I hope you are clearer about what profit is and that you are determined to make more profit…much more profit from your business.

This module will get into the nuts and bolts of how profit is created.

Why Understanding How Profit Is Created Is So Important

When you understand how profit is made at a fundamental level you will gain an intuitive feel for ideas and whether they will increase your profit or prove to be time-wasting or money-wasting distractions. [continue reading…]

In my review of the book

Fantastic Finance: Cost Volume Profit Analysis by Mohit Pandey

posted on Amazon.co.uk, I gave it 1 Star.

Here is my review.

Dreadful. Incomprehensible in Kindle format

One of the worst books I’ve ever seen.

Cost volume profit analysis or as it’s also known, break even analysis is such an important subject for business owners to understand. It needs a much better book than this one.

Sorry I came back and extended this review to explain why it was so bad but that part of the review has been lost. I find this sometimes happens with Amazon if I edit a review I’ve started.

From memory, it was very badly written so, if you’re tempted, make sure you try the Kindle sample first and you can see for yourself why I had such problems.

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The full title of this book by Vincent Turner is

“The Secret to Increasing Your Profits – An Introduction to Breakeven Analysis“.

In my review at Amazon.co.uk, I rated the book at the Four Stars level. This means I consider it to be good or very good.

Here is my review.

Short and simple explanation of break even analysis

Business owners need to have financial acumen and the two fundamentals I want them to understand are

1 Break even analysis or as it is sometimes called cost volume profit analysis.

2 The cash flow cycle in a business as a business buys stock, pays for it, makes a sale and collects the cash.

This book looks at the first issue. [continue reading…]

If you want to improve the profit performance of your business, break even point analysis suggests that there are three main ways:

• To increase sales volumes
• To increase contribution rates
• To reduce fixed costs

Actions taken by turnaround consultants and business recovery experts suggest that in many cases, the fastest acting of these initiatives is to reduce fixed costs.

What Are Fixed Costs?

First a reminder of definitions.

Fixed costs are fixed in relation to volume over a normal level of business. [continue reading…]

I am a big believer in using break even point analysis in helping a business to improve its financial performance.

In this article I will explain how a business can reduce the break even point so that it makes a profit at a lower level of sales value or sales volume.

It does not look at ways to increase the sales volume or value so that it moves from the bad side of the break even point to the good side.

You will find help on increasing sales in three other sections of my blog:

>>> Generating More Leads

>>> Improving Lead Conversion

>>> Selling More To Customers More Often

Do You Understand The Break Even Concept? [continue reading…]

Today I will look at why it is a good idea to reduce the break even point in a business and in a couple of days time I will explain how to do it.

What Is The Break Even Point?

The Break Even Point for a business is the sales volume or sales value where the business neither makes a profit or a loss but is said to break even.

I looked in detail at the break even point concept (BEP) and break even analysis in this article:

>>> Cost Volume Profit Analysis

and explained how it can be calculated in this one:

>>> How To Calculate The Break Even Point Of A Business

Calculating The Break Even Point In An Owner-Managed Business [continue reading…]

Break Even Point Analysis is a very simple to understand financial model of a business which I believe every business owner should understand.

It can be quickly used to help guide business decisions that will impact on the financial performance of the business.

When I have taught this idea to business owners and managers in Finance For Non-Financial Managers courses, the people have been amazed at how the financial fog lifts and things start to make sense.

A Quick Summary Of Break Even Point Analysis

A business is said to break even when it operates at a sales level that neither makes a profit or loss.

The two big issues to focus on are:

• Costs can be split into two categories – those that vary directly with sales volumes and those that are fixed over a short time period.
• Contribution margin rather than sales revenue is the real income of a business.

The Break Even Point Formula which calculates the break even point is:

Fixed Costs
Contribution % or Contribution per unit [continue reading…]

Fixed Cost Creep happens when fixed costs increase as sales and activity volumes increase.

This idea may seem strange.

The basic definition of a fixed cost is that it stays constant.

In reality it increases as the business commits to further costs. Hopefully it increases at a much slower rate than variable costs.

Not recognising and adapting to this idea can give a business owner unrealistic expectations about future profitability.

It can also lead to an assumption that fixed costs shouldn’t be or can’t be reduced if volumes are reducing either deliberately or because the business is going through a hard time. [continue reading…]