The owner will not be able to understand whether it is worth increasing the volume of sales or it is better to exit the business without calculating margin income, break-even point and financial safety margin.
To calculate marginal income, you need to subtract variable costs from revenue for the reporting period. Note that you subtract that part of the variable costs that was not capitalized in the inventories, but was included in the cost of sales of the period.
The calculation of marginal income allows you to understand the maximum level of fixed costs that the company can afford. If it is less than zero, then even production costs are not beaten off. This means that each unit of output produced increases losses. Neither cool marketing nor a cool management team will save the situation. It is necessary to either revise the production process, or switch to other products.
If marginal income is greater than zero, then you need to increase sales. Each unit sold will bring in money that can be spent on storage, advertising and management.
The break-even point is the amount of sales of goods or services at which a company's revenue equals its costs. It depends on the costs, the volume of production of goods and the money received from their sale.
To calculate the break-even point, you need to divide the fixed costs of the company by the marginal income. Thus, we get the sales volume at which the company goes to zero - the break-even point in physical terms. If this volume of sales is multiplied by the price of a unit of production, then you get the break-even point in monetary terms.
The break-even point calculation is used to determine the minimum sales volume at which the company will begin to make a profit and the optimal cost of goods at existing prices. Based on the results of calculating the break-even point, you can make changes to the pricing policy.
It is important for the owner to pass the break-even point as quickly as possible. If this cannot be done in a short time, the business may fail. The further a business has gone away from the break-even point towards growth, the more stable it is.
The margin of financial safety shows how far the business is from the point at which it becomes unprofitable. This is the difference between its actual state and the break-even point.
To calculate the financial safety margin, you need to subtract the break-even point in monetary terms from the actual revenue and divide by the actual revenue, or subtract the break-even point in physical terms from the actual sales volume and divide by the actual sales volume.
If the indicator is below 0.2, then the company is practically bankrupt, 0.2-0.5 - there is income, but the "airbag" is very modest, you need to earn more. Indicators above 0.5 mean that the company is consistently making a profit.
Should you need any help or have questions, My Best CFO Team is always happy to help.
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