17 - Break-even analysis

Abstract

This chapter presents a break-even analysis. Break-even point is based on the accountant's concept of sales set against cost of sales. Profit and cash are not the same. Managers should be aware of the common misconception that to break even is to be financially safe. Most managers will be familiar with the term break-even point. Break-even point is that level of activity that produces neither profit nor loss. In theory, a company can carry on trading at break-even point for ever, income being equal to the expenditure; however, profit needs to be generated to finance new machinery or research into new markets and products. Break-even point is a term that many managers will have to contend with and argue about when making decisions. Break-even is useful for the calculation of profitability of new products, particularly when attempting to fix a selling price and production targets. Break-even point, if achieved, does not mean that a company is safe from cashflow problems. Break-even point in sales value and absorption profit is not a combination and offers no guarantee that a company will be immune to a cashflow crisis.