Break Even and Cost Volume Profit Analysis
Explained in 3 Minutes When can you say a business is good or not?
Quite simply, it’s good if the money earned is more than the money spent. However, a business
has to spend on long term stuff and short term stuff.
For example, if your business spends on a new shop, this is a long term thing. If it
spends on the cost of lemons because you’re selling lemonade in a lemonade shop, this
is a short term thing. When we say that a company breaks even, we are generally only
comparing money earned against the short term stuff like the ingredients which go into your
lemonade, the salary you might pay to your lemonade maker and shop manager, the insurance
and rent for you shop, advertising of your lemonade, taxes for your business, and other
similar things. When you earn enough from selling lemonades
to pay for these short term things, we may say that a company has reached its break-even
point. When you’re not selling enough lemonades and not earning enough to pay for these short
term things, your business is said to be losing money.
When you’re selling more than enough lemonades to earn more than enough money to pay for
these short term things, then this extra earnings is called profit.
So when you’re at break even point, you’re not in a good situation, but also not in a
bad situation. You have no profit, but also no loss.
If you’re still starting out in your business, you of course want to target reaching break
even point so that you don’t lose money. Break Even Analysis is when we try to find
out how much sales we need so that your business can break even. But after a while, you’ll
want to be better than break even. You’ll want to have some profit as well.
So when we try to find out how much sales we need to be profitable, do we still call
this Break Even Analysis? Normally, no. We now call this Cost Volume Profit Analysis,
or CVP for short. With Cost Volume Profit Analysis, we try to
find out how much sales we need to reach a certain target profit.
So anyway, that’s the super simplified explanation of Break Even and Cost Volume Profit Analysis.
Would you like to learn how to calculate break even point the easy way?
Check out my free video at MBAbullshit.com See ya there!