by Paul Simister
on May 9, 2013
The Margin of Safety is a very useful measure that should be used together with break even point calculations.
The break even point identifies the sales volume or value where a business neither makes a profit or loss in the period.
>>> Why Break Even Point Analysis Is Important
>>> The Cost Volume Profit Relationship
>>> How To Calculate The Break Even Point Of A Business
What Is The Margin Of Safety?
The margin of safety is the extra sales value or volume the business has sold in a period in excess of the break event point.
Here is a quick example. [continue reading…]
by Paul Simister
on May 7, 2013
In my opinion, break even point analysis an essential concept for monitoring the health of an owner-managed business. When it’s done properly, it provides an effective early warning system that a business owner should pay attention to.
Practical Problems With Break Even Point Analysis
There are practical problems that make it difficult to transfer the simple classroom idea to the real world.
Financial Accounts And Even Management Accounts Rarely Show A Contribution Margin [continue reading…]
by Paul Simister
on May 5, 2013
As we have a deep look at break even point analysis and why it’s essential for business owners to understand if they intend to navigate their businesses to profitability, the focus so far has been on the difference between variable costs and fixed costs.
>>> Why Break Even Point Analysis Is Important
>>> The Cost Volume Profit Relationship
We also need to understand contribution margin and here is why.
The Break Even Point Formula
The basic way to calculate the break even point as a sales value is:
Fixed Costs
Contribution margin %
If you know the contribution margin per unit, you can use that instead to calculate the sales volume needed in units of sale.
What Is The Contribution Margin?
Contribution (margin) is the difference between the sales price received from the customer and the variable costs of buying, making and delivering the product or service. [continue reading…]
by Paul Simister
on May 1, 2013
The break even point ( BEP ) is a fundamental concept in the financial management of a business.
I believe that business owners and entrepreneurs need to have a great understanding of break even point analysis and the associated cost-volume-profit relationship and cash flow management if they are going to create a long term successful business.
It’s not difficult to calculate and understand and it will give you a much deeper understanding of the dynamics of your business and how you make money in it.
>>> See Why Break Even Point Analysis is Important
by Paul Simister
on April 30, 2013
Break Even Point Analysis is based on the cost volume profit relationship in a business.
What Is Profit?
Profit is the difference between sales revenue and the total costs incurred in the business.
If sales revenue is greater than costs, the business makes a profit.
If sales revenue is less than costs, the business makes a loss.
The point where sales revenue equals costs is known as the Break Even Point.
That’s all fairly straightforward and obvious but you may have missed an important point.
Although the objective of a business is to make a profit, you can’t act on profit directly.
Instead your actions will influence revenue and costs and depending on how they change, your profit will change.
That’s why it’s important that you understand how your costs change or don’t change for different levels of sales volume.
by Paul Simister
on April 29, 2013
I don’t expect business owners and entrepreneurs to turn themselves into accountants and finance experts but I do believe that there are two financial concepts that they must understand to be consistently successful.
The Two Critical Finance Issues Every Business Owner Must Understand
- Break even point analysis
- Cash flow forecasting, management and control
These will make sure that the owner is managing for profit and cash. [continue reading…]
