Breakeven analysis in commercial enterprises


The profitability margins, generally defined as a difference between an income element (total incomes, operating incomes, sold production, sales turnover or total production) and an expenses' element (intermediary consumption, variable expenses, direct expenses, total expenses) represent very important instruments at the disposal of the managers to ensure the maximum efficiency in managing the various aspects or the whole company activity, having in mind the ultimate purpose of maximizing the shareholders' value.


Among the company's profitability margins are part of value added, with particular importance at both micro and national economy, the margin variable costs, direct costs margin, gross operating surplus, accounting profit, the classical instruments (traditional) of orientation of business enterprise, and some indicators of "modernization" of profitability and performance of the company, that economic value added, value added in as cash flow, residual income, etc.

Classic indicators of the company's profitability margins, their interpretation and the development level to register the details of the objective of maximizing firm value, is more difficult, a positive level of their achievement can not guarantee that. Meanwhile, indicators to accurately assess the level of "classical" and the study requires a smaller or larger number of correlations with other economic-financial indicators, and analysts must be familiar with any restrictions and contradictions associated with each of the indicators mentioned.

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Modern interpretation of the performance indicator level is much easier, guaranteeing them a positive size and compliance with the objective of maximizing firm value, because these indicators are constructed with consideration of most of the opportunity cost of capital raised in the company's activity (they go economic return from the premises). Next we refer to some of the most significant margins "traditional" of profitability, which we consider representative and which more interest in terms of business analysis opportunities they offer. Section Finance - Accounting.

Value added

Value added is one of the most important indicators of economic and financial performance of the enterprise and an initial margin of profitability of the company.

Expresses the value of newly created value added in productive and commercial activities of a company during a certain period of time. Added value is not reflected directly in any of the usual statements of accounts, but as a component of intermediate balances management panel. Value added can be determined by two methods, namely those directly and indirectly (through the analytical method).

Under the indirect method, value added (VA) is determined by adding value added products (VAP), respectively related to the production year and the added value of business (Vac). The added value produced is obtained by subtracting consumption of goods and services from third parties (But) the production budget (Qe). Value added from trading activities (primarily from the resale of goods) is obtained by deducting from sales revenue (excluding VAT) purchase cost of goods.

We = VAP + Vac = (Qe - Ci) + (VVM - CMV)

Several types of value added ie gross value added (GVA) and net added value (NPV) and that produced added value and added value achieved.

The first two categories of value added (GVA and net value added) are obtained depending on whether to amortization (A) intermediate consumption related production year:

VAB = Qe - but

But is the cost of materials and supplies, fuel, energy, water services (external services received);

Van = VAB - A or Van = Qe - Qe Cm = - (CCM + A)


Cm is the material costs of the enterprise, consisting of material costs plus depreciation.

In this case, because production is based on year, maintaining the heterogeneity of value added indicator, thus including value added tax and value added production sold stored pertaining to production and production assets. Value added tax turnover achieved is called value added and value added tax year production is called added value produced.

Under the direct method (analytical or additive), value added will be determined by summing the incomes of participants (direct and indirect) to create added value: the employees, creditors, shareholders, state, and the company itself.

Thus, the size of added value can be calculated as follows:

We = Cp + Cf + Div + IT + M,

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Cp - gross salaries of personnel, including company contributions to social protection;

Cf - interest expense;

Div - gross dividends;

IT - taxes (including income taxes) payable State enterprise;

Af - self-financing available for the enterprise (profit plus depreciation ).

Among the advantages of value added in the traditional system of performance indicators, noted:

expresses the real contribution of business to achieve its production. Unlike turnover, which may carry high levels and because of the relatively small scale operations on certain parts or semi-large amounts, the company added shows real effort to achieve its turnover;

is a relevant criterion for assessing the increasing workload of the enterprise, applying the same corrections for inflation and the turnover;

highlighting the contribution of each participant in training added value through the distribution rates of value added. By comparing each participant's contribution to total value added can estimate the distribution of global income it generates compete directly or indirectly;

reflect the utilization of production factors. Even with an identical volume of value added and structurally identical operating factors, input use efficiency may be different. Labour productivity (calculated as the ratio of value added and average number of employees) may provide better results or worse over the operating efficiency of the use of fixed assets (determined as the ratio of value added and operating assets). Rate linking the two reports is the degree of technical procurement employee (Operating assets / average number of employees);

indicates the degree of integration of the company by reporting added value to business. The report is larger, the more business will be better able to ensure greater independence in running its manufacturing process (not to use the services of other firms for execution of works or delivery of parts). But not always be said that integration is increasing and the benefit of the company, since the first draw and an increase working capital requirements for operational and on the other issues may arise to ensure the highest quality of products and labor productivity. The trend worldwide is to contract a party outside the company increased the volume of parts and work, especially for those requiring a large volume of labor. In this way you can achieve high productivity and flexibility for special activity periods of recession.

Meanwhile, the rate of value added to turnover expressed overall productivity of a firm and depends directly on the industry and the mining cycle.

Like any indicator built solely on the basis of financial accounting, the value added and development must be assessed with caution.

Because calls to accounting information, such as those concerning the amount of material costs, the depreciation and other items that may have a different background from one body to another (it is sufficient to mention here the methods of assessment stocks or the approach to depreciation), comparisons between companies may be burdened by the existence of those items mentioned.

Section addition, because of the heterogeneity of value, its growth is not always regarded favorably. For example, if adding value on account of increased staff costs may be recorded in the same short-term negative consequences for the company's cash and profitability, because staff costs directly influence these two components of the financial mechanism of the enterprise.

Long-term and the national economy, but adding value by increasing salary expenses account (provided that the index surpassed the salary expenses to turnover index) has favorable effects because one of the main "engines" of growth is to increase domestic consumption.

Also, adding value on account of financial expenditure is somewhat difficult to assess, because different consequences that can generate this event.

Although, in general, increased financial costs is not the recommended way to increase value added, there are situations in which assessments can be tinted. Thus, if the company makes a profitable investment, which will increase labor productivity, partly financed by loans, then increasing financial expenditure is regarded favorably, taking into account the effect of shield taxes it generates those costs.

In essence, the final assessment will depend on whether newly hired staff is an investment that will generate higher incomes purchase costs or simply a cost item. Also, use of value added products (linked to production year) can lead to erroneous assessments, because of poor production quality that can be stored or can be evaluated at prices too high (due to production costs too high), which will not be recognized market.

Direct costs margin

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Margin direct costs (mcd) is determined by subtracting the direct costs of turnover (As) of the company:

Mcd = Ca - Cd.

This margin is irrelevant to the firm if they are set properly all costs related to a cost object (one or more core activities of the company, one or more commodities, or one of the main departments of the enterprise). Margin identifying how indirect costs are absorbed by the main products and activities and implicitly products are more profitable in this respect, that those who have higher margins on direct costs. Meanwhile, the method can provide an interesting perspective on possible structural improvement in profitability of the company, because some products, while margins increased direct costs, requires a very high volume of indirect support costs.

Dividing the company into direct and indirect costs led to the development of ABC costing method which gives very good results especially for firms with a high volume of indirect expenses and costs more objects.

Youth indirect costs, costs common to several objects, each object are distributed in proportion to the direct cost calculation through the key distribution.

Disadvantages of using the analysis of this margin are related to difficulties in establishing precisely that direct and indirect costs, especially where cost objects with a smaller area.

Margin variable costs

This margin is an important indicator and a method of analyzing the profitability of the firm, directly linked to the study of break-even enterprise.

The calculation of profit margins with this company is as follows:

Turnover - Variable costs = margin on variable costs, fixed costs = Result (profit) gross or net

Many of the activities taking place in forecasting firm estimates are based on certain levels of production. Study the correlation between sales volume firm, operating cost structure and gross profit, at various levels of production is called Cost - Volume - Profit or breakeven analysis.

Break even, called equilibrium or critical point, is used for purposes other than determining the breakeven quantity or the value of a firm. For example, break-even analysis is used to assess profitability of new businesses created and new products. In addition, it represents an important analytical tool for measuring the effects of price change for sales of fixed and variable costs of production levels to be reached before mining company to take advantage of.

Break-even can be expressed as graphic or algebraic, and the combination of the two expressions. One of its expressions is:

PC (Pr) = CF / Rmcv,


Pc - the critical or break-even point; Cf - total fixed costs;

Rmcv - margin rate variable costs.

Expenditure variable rate margin (Rmcv) is determined as follows:

Rmcv = MCV / As * 100 = Ca-Cv/Ca * 100


Like - turnover;

Cv - total variable costs;

Margin variable costs (CVM) is also used to determine other forms of expression of risk operating outside breakeven. Section Finance - Accounting

Thus, the operating lever (called the elasticity of operating profit to sales volume variation), this margin is determined as follows:


Lever operating level is determined and the ratio of operating profit percentage change (Δ% PBE) and QV), as follows:percentage change of physical volume of production sold (Δ )

NPE = Δ% PBE / Δ% QV

Gross operating profit will be more sensitive to changes in the quantities sold as fixed costs of operating ratio is higher, which will cause a greater risk of exploitation.


Level operating leverage of a firm depends on the nature of the production process. If the company uses a large amount of equipment and machines that replace labor, then it will record a relatively high fixed operating costs and low volume variable cost of operation. Such a cost structure leads to a high level of operating leverage, that can achieve a higher operating profit or loss if sales are higher than operation, if sales are low.

Level of a firm operating lever is higher when the firm operates around breakeven. It should be noted that the NEP is negative below the break-even production. NPE show a negative percentage reduction in operating losses, which occur as a result of increased production by 1%.