BREAK-EVEN-POINT(BEP) ANALYSIS FOR BUSINESS PLANS AND FEASIBILITY STUDIES


BREAK-EVEN-POINT(BEP) ANALYSIS FOR BUSINESS PLANS AND FEASIBILITY STUDIES


Break-Even-Point(Bep) Analysis For Business Plans And Feasibility StudiesIn recent times issues relating to Break-even analysis for business plans and feasibility studies are becoming very critical matters in business start-up success. Again, Matters relating to break-even analysis for business plans and feasibility studies are; break even analysis excel chart,break even analysis template business plan,assumptions of break even analysis, break even analysis calculator and graph,simple break even analysis template, break even analysis template for service business,break even analysis template for restaurant,break even analysis template excel,break-even analysis formula,break even analysis definition.

In the light of the above, have you been thinking about how to do break-even analysis for your business? Or you are having problem in arriving at the BEP of the business plan and feasibility study which you are writing? If you follow me in this article you will find out that it’s a simple reasoning process. Moreover, the purpose of doing a break-even analysis is to determine exactly when you can expect your business to cover all expenses and start generating a profit—which is a crucial milestone in the early days of any company. In every business plan and feasibility study this point is also very crucial, in fact at the early days of the business, this is the point to watch.

Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies

In fact, Break-Even Point (BEP) for an organisation is a point at which there is no profit and no loss in the business activities. It is a point in the financial analysis where the organisation covers its total cost but makes no profit. At this point total cost equals fixed cost plus variable cost i.e. Total Cost = Fixed cost + Variable costs. A company has achieved break-even when its total sales or revenues equal its total expenses ( Total Cost = Total Revenue = zero profit). No profit has been made at the break-even point, nor have any losses been incurred. As a matter of fact,this calculation is critical for any business owner because the break-even point is the lower limit of profit when determining margins.


READ ALSO: Writing Your Business Plan - Get Started.

Generally speaking, it is derived narratively, mathematically and graphically.
Some of the questions to answer in this article are:
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Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies

ASSUMPTIONS FOR BREAK EVEN ANALYSIS

Constancy of fixed costs – that fixed cost remains constant.

Constant technology – BEP ignores efficiency that could come from change in technology

Constant returns to a factor – that returns or factor outputs will remain constant

Constant sales price – That prices remain the same.

Identity of output and sales – quantity must be specified.

Division of costs – costs are divided into fixed and variable

A benchmark period is used for working – period specification

COST BEHAVIOUR

The knowledge of cost behaviour is very vital in assisting management make operational decisions. This also help management to understand how profit in an organisation can be improved upon through a variety of strategies. For example, manipulating price could increase the volume of sales to increase profit. In writing the sales (revenue) and marketing section of your business plan and feasibility study.

In understanding the concept of Break Even Point there are certain variables that we need to explain. These are: 
(1)Fixed cost (2) Variable cost (3) the relationship between profit and contribution (4) other variables that could be manipulated to ascertain the Break Even Point – Unit price, Sale or production quantity/volume, operational expenses.
Once the principle of BEP is understood, it can be applied in every business type; manufacturing, retailing, construction, distribution, Service, processing etc.

Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies

EXPLANATION OF COST VARIABLES/ELEMENTS

Fixed costs: 

These are costs that are the same regardless of how many items you sell. All start-up costs (pre-operational expenses), such as incorporation costs, rent, insurance, and computers, are considered fixed costs because you have to make these outlays before you sell your first item. You can divide this into tangible and intangible costs. Tangible (cost) assets are depreciated and absorbed according to the relevant accounting standards. Intangible assets like preliminary/pre-operational expenses, royalties, patent rights are amortised and absorbed accordingly to. Accounting policy must be consistently applied for a going-concern, therefore depreciation/amortisation rates used here may not be changed sooner.

Variable costs: 

These are recurring costs that you must absorb with each unit you sell. If you're operating a greeting card store where you must buy greeting cards from a stationary company for N10 each, this N10 represents a variable cost. As your business and sales grow, you can begin appropriating labour and other items as variable costs if it makes sense for your industry. Variable costs vary with quantity bought, manufactured or sold. If you are a baker, all the flour, oil, spices etc. which you use varies positively with the quantity produced. For example, I a bag of flour makes 100 loaves of bread for you, it means you need another one bag for another 100 loaves. Most direct cost of productions are always variable costs.

What is CONTRIBUTION, and what is its relationship with PROFIT?



I will explain this by the following common sense reasoning equations:
Sales – Total Cost = Profit …………………………..        (i)
Total cost = Fixed cost + Variable costs……………. (ii)
Substitute equation (ii) into equation............. (i)
Sales – Fixed cost + Variable cost) = Profit……….. (iii)
(Sales – Variable cost) – Fixed cost = Profit……….. (iv)
Sales – Variable cost = Contribution……………………. (v)
Substitute equation (V) into equation (iv)
Contribution – Fixed cost = Profit ……………………    (Vi)
Contribution = Fixed cost + Profit ……………………… (vii)

Contribution which is Sales less Variable costs is what is left from turnover after recovering all the direct or variable cost. It is contribution towards off-setting the fixed cost. A business man can still remain in business at this point. But he must work hard to generate enough contributions from his various activities to off-set the fixed cost when they are due for renewal again, otherwise the business folds.
Let me illustrate further with the following table.


Break-even-Point Analysis for Business plans and feasibility stuies
BEP Table

Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies


Correspondingly,notice that one particular feature which fixed cost exhibits is that it is always constant no matter the quantity involved. Note also that variable cost varies according to quantity sold. Therefore in determining the break-even point of your business, factors to manipulate are quantity, price and expenses. In the table above the organisation can not sell quantity below 1,000 units.

The Break-even Formula: How to Do a Break-even Analysis

This is fairly simple. To conduct your break-even analysis, take your fixed costs divided by your price minus your variable costs. As an equation, this is defined as:
Break-even Point = Fixed Costs/(Unit Selling Price - Variable Costs). Using figures from our table this is:
       
                                   

5,000    = 1,000 units.
20 - 15

This calculation will clearly show you how many units of a product you must sell in order to break even. You've recovered all costs associated with producing your product, both variable and fixed, when you've reached this point.
Every additional unit sold after this increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits.


Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies


The above table can also be shown in the graph below.


BREAK-EVEN-POINT(BEP) ANALYSIS FOR BUSINESS PLANS AND FEASIBILITY STUDIES


Note that sales line intersects total cost at 1000 units.


PRICE SETTING

Setting a Price That Helps Your Business Hit Break-even:

Setting the right price is critical to your break-even analysis and eventually turning a profit with your start-up. You can't calculate expected revenue if you don't know what your unit price will be. Unit price is the amount you plan to charge customers to buy a single unit of your product.

Pricing can involve a complicated decision-making process on the part of the consumer, and plenty of research has gone into the marketing and psychology of how consumers perceive price. Take a little time to review articles on pricing strategy and the psychology of pricing before choosing how to price your product or service.  


Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies

Pricing methods:

There are several schools of thought on how to treat price when you're conducting a break-even analysis. It's a mix of quantitative and qualitative factors. You should be able to charge a premium price if you've created a brand new, unique product, but you'll have to keep the price in line with the going rate or perhaps even offer a discount to get customers to switch to your company if you're entering a competitive industry.

Cost-based pricing: 

With this method you have to figure out how much it will cost to produce one unit of an item and setting the price to that amount plus a predetermined profit margin.
Price-based costing: This encourages business owners to "start with the price that consumers are willing to pay when they have competitive alternatives, and whittle down your costs to meet that price. This allows you to lower your price and still turn a profit if you encounter new competition. Different pricing methods can be used.

Limitations of the Break-even Analysis:

It's important to understand what the results of your break-even analysis are telling you. If the calculation reports that you'll break even when you sell 1000 units, your next step is to decide whether this seems feasible. You can also adjust your break-even quantity higher than the 1000 units to say 1,200 units, so that even if you don’t get the 1,200 units, you could eventually hit the 1000 minimum units. That extra is what is called ‘ Margin of safety’.



Break-Even-Point(BEP) Analysis For Business Plans And Feasibility Studies

If you don't think you can sell 1000 units within a reasonable period of time as dictated by your financial situation, patience, and personal expectations, then this may not be the right business for you—it may not turn a profit quickly enough to stay alive. If you think 1000 units is possible but would take a bit of time, try lowering your price and calculating a new break-even point. You might also take a look at your costs, both fixed and variable, to identify areas where you might be able to make some cuts.

Again, understand that a break-even analysis is not a predictor of demand. If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point.

Realise also that these are all estimations, you have to work hard to achieve it. The division between variable and fixed costs may not be accurate. Environmental factors may not be built inside costs analysis yet.

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