Strengths and limitations of Breakeven

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Strengths and limitations of Breakeven

Advantages

  • Focuses entrepeneur on how long it'll take before a start-up reaches profitability
  • Helps entrepeneur understand viability of the business proposition and also those who will lend money to, or invest in the business.
  • Margin of safety calculation shows how much a sales forecast can be over-optimistic before losses incur
  • Helps entrepeneur understand the level of risk involved in a start-up
  • Illustrates the importance of a start-up keeping the fixed costs down to a minimum  (higher fixed costs = high breakeven output)
  • Calculations are quick and easy, can give quick estimates rather than taking a long time to work out

Disadvantages

  • Unrealistic assumptions, products are not sold at the same price at different levels of output, fixed costs vary
  • Sales are unlikely to be the same as output - may be some held stock or waste
  • Variable costs do not always stay the same, as output rises business may be able to benefit from buying power which results in lower variable costs
  • Most businesses sell more than 1 product, thus break-even becomes harder to calculate

Evaluation

In conclusion, break-even should be seen as a planning aid rather than a decision making tool. Break-even is never 100% accurate and accuracy can wildly vary and differ depending on amount of products, assumptions made, what changes in the time period etc. Thus, it should be used to guide decisions related to do with the budget of the business.

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