Strengths And Weaknesses of Break-Even Analysis
Entrepreneurs might be brave and ready to take risks, but is not only a matter of attitude. It’s backed up by numbers, rationality and informed decisions. Financial tools are a great way to access such careful behavior and prevent business failure. Break-even analysis is one of the most popular instruments for startups and entrepreneurs. Why? Because it’s based on a formula which helps evaluating the level of risk carried by a startup business.
We have a dedicated page about it here. Many members of the GetLaunched community asked us if this is THE TOOL, the „must have“. Well, it is and it isn’t. That’s why we thought of making a short list of strengths and limitations of the Break-even analysis, just to make it clear what this tool is and what it isn’t.
- Break-even analysis is based on the unrealistic assumption that sales prices are constant at different levels.
- Break-even charts may give you headaches, especially if finances are not your forte.
- The representation of costs and revenues by straight lines is simplist and unrealistic.
- It can only be used for a single product or single mix of products.
- It’s unlikely that fixed costs will remain the same at different production levels.
Strengths of break-even analysis
- Reflects the level of risk carried by a startup business.
- The equation gives a specific break-even result.
- Calculations are fast and simple comparing to other tools. Besides, it’s useful for creating estimates.
- Measures the profit and the losses and for production and sales at many different levels.
- Helps predicting the effect of changes in the sales price of products.
- Analyzes the crucial relationship between fixed and variable costs.
- Offers accurate predictions of the effect some changes is costs and efficiency would have upon profitability.
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