Analysis of the break-even of the enterprise. Break-even analysis of production

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

A break-even analysis is a process by which a business can decide how much to produce and sell finished products. This allows you to determine when you can cover an expense item.

With regular analysis of these indicators, you can maintain your position in the market for goods and services and feel confident in a competitive environment. And this will help the organization not only stay afloat, but also rise among other firms.

Breaking even

To conduct a break-even analysis, you will need to have a list of organization indicators that are among the main ones. The first step is to identify mandatory and recurring costs as accurately as possible. Expenses for paying taxes, purchasing raw materials and supplies to the workshop, for manufacturing products, paying employees, operating equipment, advertising campaigns, packaging finished products, paying utility bills, renting land or premises and much more should be included.

In progress of break-even analysisthere is a comparison of all expenses with income from the sale of goods and services. The goal is to select a certain period, calculate the amount of sales income, calculate all expenses and compare whether the income is able to fully cover the expense item. With the correct calculation, it will be clearly seen how many units of goods for a certain period of time need to be produced to cover costs. You can also calculate how much goods you need to produce in order not only to break even, but to make a profit.

Breaking-even analysis can even be beneficial for several reasons:

• ability to make predictions;
• after receiving the result, you can make adjustments to the work process;
• you can release new products using old indicators;
• can be used as a starting point and make predictions.

Enterprise break-even

When conducting the activities of the organization, the owner of the business must know the situation with the financial situation of his production. Many tend to attribute such knowledge to assumptions rather than reliable calculations. Most entrepreneurs rely on their intuition, making assumptions and conjectures. All analysis is carried out on the basis of calculations of cash from the cash desk. It is rare that entrepreneurs do a break-even analysis of the enterprise. Some of them are developing business projects. The data obtained on its basis will not be reliable, since all business plans are made according to the same template, and they are used to attract investors. Such mistakes tend to be madesmall enterprises, they are much less common in medium-sized companies. Many people believe that the break-even analysis of an enterprise is a tool that works exclusively with finance, and only competent economists and accountants with experience can work with it. But this is absolutely not true. Such calculations are required by entrepreneurs, those people who are responsible and responsible for all decisions.

Break-even is a financial position in which the organization's costs can be fully offset by manufactured and sold products. In this case, the profit margin is zero. During the analysis, answers to the questions should be obtained:

1. How much income do you need to have to cover all costs?

2. How much product or service must be produced to cover the organization's costs?

The analysis doesn't end there.

For calculation purposes, expenses should be divided into two categories:

1. Mandatory expenses that are available every month

2. Recurring expenses.

Mandatory expenses include all expenses of the organization that do not depend on the services provided.

This includes all costs that are fixed every month. For example, salaries of employees, payment of taxes, insurance premiums, payment of utility bills and much more.

Recurring costs include all costs that are fully associated with production. For example, the purchase of the necessary material and raw materials, the cost oftransportation, remuneration of employees who work piecework. This includes all the costs that are necessary for the manufacture of one unit of goods.

When compiling a break-even analysis of an organization's activities, data are taken into account that do not change for a certain time. In reality, everything is different, and there are many unforeseen situations that can adversely affect the enterprise. If the business owner wants to get accurate calculations, down to kopecks, then this option is not used. Since when conducting an analysis, you can get the dependence of how the size of profit changes in relation to costs.

When analyzing the break-even of production, you can see how profit, net income and expenses depend on each other in a certain period of time. The goal is to find out fluctuations in finances in case of varying production activity.

Break-even is a state in which the organization does not make a profit and at the same time does not incur losses, it works to zero. To make a net profit, you need to receive income from the sale. Profit is expressed in the number of manufactured products that must be sold and subsequently cover all the expenses of the organization.

The task of analyzing the break-even point of production is the search for a break-even point, that is, such a state of the organization in which it is possible to produce a minimum of finished products and work to zero - to cover all costs. Thus, there are no profits and losses in the organization. The amount of income receivedpurchase materials and raw materials for production and pay mandatory monthly expenses.

Methods used in the work

To conduct an accurate analysis and find a critical point, it is worth knowing what factors can affect breakeven.

One of the factors is the production volume. In cases where production figures remain constant and do not change over time, the analysis was made accurately. A low level indicates that the organization is successful in the market. Other factors can also affect the break-even level. For example, the number of employees, construction work, and more.

In practice, there are several methods of break-even analysis, but the most popular are three:

• math;
• gross margin;
• graphic.

The method of control is considered mathematical

It is used to determine the break-even of an organization using formulas. Many formulas are used to find profit, but among them one can be singled out, which is currently the most popular. It is expressed in the following way: the amount of profit can be found after subtracting all costs, which include mandatory and recurring expenses, from the profit of the organization.

The method for calculating gross profit is also called contribution margin. This method is an alternative in the event that it is impossible to use a mathematical variant. In this case, it is accepteduse the following formula: to find marginal income, you need to add the received profit to the amount of expenses.

Graphic method

The graphical method tries to find a point that will break even, for this a graph is built. It shows income and expenses. Each indicator is marked in the form of lines. The point at which these lines intersect will be considered breakeven.

The data of the method are used for research in a certain period of time. Not recommended for long term use.

Margin analysis

In order not to conduct activities at a loss, you need to find a point that is breakeven. The ideal option is the moment when the organization receives income. But for this, an equilibrium must be determined in which the income received will cover the costs, and the enterprise will go to zero.

All calculations must be made without VAT and tax. This is because there are times when some of the costs are taxable and the rest is not. Therefore, it is better not to take into account the data that contains taxes in the calculations - this will avoid errors in the analysis.

To find the necessary data, break-even margin analysis is suitable, in which there is a division into mandatory and recurring expenses.

In the process of activity, all expenses can be classified as fixed only conditionally. This is due to the fact that prices rise every year, therefore, fixed costs also increase. Thus, if you add up all the costs, you get the total costs. To determine the profit, you will need to subtract expenses from the amount of income received.

If this formula is converted and the division of expenses is taken into account, then to calculate the net profit, you will need to subtract mandatory expenses and periodic expenses from the amount of profit.

You can calculate marginal income if you subtract periodic expenses from the organization's income. The amount of income received is required to cover mandatory expenses and income. Thus, mandatory expenses should not exceed the marginal income. Such income should not be negative. Each product sold will increase the minus in which the company is currently operating.

Financial analysis

Financial break-even analysis is a way of examining a company's financial data and performance for adoption by management.

Such analyzes are carried out in specially designed programs. In the process, quantitative calculations are made, which are based on various indicators, as well as an assessment and comparison of the data obtained with other organizations. Financial analyzes include:

• asset analysis;
• organization's solvency;
• Stability in the market of goods and services.

With its help, such a moment as bankruptcy can be revealed. They are used by banks to issue loans or by the chief accountant when preparing reports.

At the heart of all financial analysisare the coefficients. Among them are:

1. Relationship between capital and assets of an organization.

2. The ratio of assets that are in circulation to liabilities at a certain point in time.

3. The level of profitability of capital owned.

4. The level of profitability as a result of the sale of goods and services.

To obtain all the necessary information that is required for the analysis, in most cases they use the data from their accountant reports. If you need to make a deeper and more detailed calculation of indicators, then data from financial indicators is involved. To find a point that will break even, use accounting data and production accounting.

Project analysis

Project break-even analysis is an important element in evaluating the effectiveness of projects. The investor must have information about when production will break even and how much to produce for this product. To make calculations, periodic, mandatory and general costs are used. Due to the constant rise in prices, on which the cost of rent, utilities and other things depends, it is generally accepted that there can be no fixed costs. Therefore, for different time frames, the analysis should be repeated. Break-even analysis of products is carried out only for one product name. If the workshop produces several types of goods, then the calculation of indicators should be individual for each case. It is worth taking into account the fact that even if the obtained data satisfy allpreferences and wishes of the investor, it is quite difficult to decide on the basis of this whether the project will be effective or not. What are the objectives of the analysis process?

Evaluation of the profit and break-even analysis is made only if a short period is taken. Also, for this, certain conditions must be met and the production of the organization must exist with a limited capacity. In other words, the organization should not expand during this period, install new equipment for work, open additional production facilities and offices.

In such cases, conducting a break-even analysis, you can solve a number of tasks, for example:

• find a point that will subsequently break even for the organization;
• determine how much finished product must be produced for further sale in order for this point to be reached;
• what value should be set for goods and services in order to be able to increase demand and obtain the desired income;
• what production technology should be chosen to increase the level of efficiency;
• given the opportunity to form a production plan that will be optimal.

Thus, the calculation of the break-even analysis in an organization is considered one of the options for studying the demand for goods and services in the current economic situation in the country.

Under what conditions should the analysis be carried out?

To conduct a qualitative analysis of the pointbreak-even must comply with certain conditions and ratios. They are as follows:

• profit from sales and the amount of recurring costs are entirely dependent on the capabilities of the enterprise;
• performance level should remain the same;
• during the period when the analysis is carried out, no changes in prices for finished products and purchased material should occur in production and in the organization;
• the whole production structure does not change;
• necessary to determine the amount of mandatory and recurring costs as accurately as possible;
• by the time the analysis is completed, the enterprise should not have any resources left for further production, or they should be in a minimal amount.

If one of the points is not observed in the process, then it is very likely to get an erroneous result. If you stick to the basics of break-even analysis, then you can do everything right.

What does this mean for companies?

Finding a breakeven point is only used if planning is short term. If there is a search for this point, then this does not mean at all that the organization plans to carry out its activities to zero, without generating income. In most cases, they are looking for a break-even point only in order to visually see the bottom bar for the sale of finished products.

After this point is calculated, you can get a uniform balance between the amount of income andall costs. After that, you can have a clear idea of how many more units to produce to achieve the desired profit. If everything is done without errors, then it is possible to identify the main factors that help in achieving the goals. Thus, the break-even point helps the organization to develop and receive income from doing business.

Every businessman or a person who is far from financial matters understands that break-even is the key to the success of an enterprise. An organization that does not make a profit simply cannot exist, and analysis is simply necessary to obtain it.