Question

explain what a break even analysis is. Why is this tool so important to the small business owner? What information does it provide to the small business owner. How can the small business owner use this tool?

Answer 1

-BREAK EVEN ANALYSIS?

A break even analysis is a financial tool which helps you to determine at what stage your compan, or a new service or a product, will be profitable.

Break-even is a situation where you are neither making money nor losing money, all your costs have been cover. Break even analysis is a calculation of the point at which revenue equal expenses.

-IMPORTANT TO SMALL BUSINESS OWNER

In order to succeed, entrepreneurs must minimize the risk of failure through effective planning and research long before they launch their business. Not knowing the point at which a business will break even dramatically increases the chance of failure.

Helps design pricing strategy- It's the simplest way for a business to determine if what it charges for its products and services will cover what it costs to make the products or provide those services.

It is used by the companies to determine the level of profitability.

Budgeting and setting targets- break even analysis makes it easy for the owner to fix a goal and set a budget for the firm accordingly.

Manage the margin of safety- in financial breakdown, the sales of a company tends to decrease. The break-even analysis helps the company to decide the least number of sales required to make profits. With the margin of safety report, the management can execute a high business decision.

It allows business owners to calculate how many sales they need to achieve in order to cover all their costs.

-INFORMATION PROVIDE TO THE SMALL BUSINESS OWNER

A very effective tool in the hands of management is profit plan­ning. The higher the break-even point, the less chances are of operating the business at a profit over the years.

(2) Profit performance can be improved

(a) By increasing volume;

(b) By increasing selling price;

(c) By decreasing variable costs, and

(d) By decreasing fixed costs.

(3) “ it can plan, control, pre-test, decide and co-ordinate all of its business activ­ities.”

(4) It supplies the necessary framework for decision-making on the part of management.

(5) It gives an idea about contribution which means the difference between sales and variable cost. So, profit earning capacity of the firm may be known. If from the amount of contribution fixed expenses are deducted, the profit figure will be available.

(6) The margin of safety of the firm can be known from this break­even chart. Margin of safety can be known by deducting break­even sales from the actual sales. It plays an important role as an indicator as to how the margin can be increased.

(7) The chart enables to prepare a proper budget of the firm. Thus it is possible to maximize profit.

8) By preparing break-even chart, the price policy should be so formulated as to keep the price within the purchasing capacity of the people.

-HOW BUSINESS OWNER USE THIS TOOL

if you are producing and selling products. You need to know if these products are profitable. Creating a break even analysis will give you the information you need on profitability. You should construct a break even table to show break even points for various sales volumes and unit prices for each product.

It can use it to set price of its product and services

The break even analysis is a handy tool to decide if a company should or shouldn't start producing and selling a product. In addition, you calculate the break even point, also known as the critical point. It is the turnover at which the total revenue would equal the total costs.