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Breakeven analysis is a common analytic approach. It is all about knowing how much costs you will incur and how much profit you will make. But in certain organizations this might not be simple. There could be hidden costs, suppressed costs, and predicted costs. Much the same way there could be predicted profits. All these have to be factored in.
Before determining costs you have to know the type of costs. They are fixed and variable costs. Fixed costs are static costs. They remain the same over a period of time. An example of a fixed cost is office rent. It remains the same for at least a year. Similarly, insurance, and IT infrastructure are fixed costs. Some companies tend to allocate their own items under fixed and variable costs. It is left to the company to decide which of its expenses are fixed and which are not.
Variable costs are non-static costs. Sudden expenses in the middle of a financial year can be deemed to be variable costs.
You need to ascertain the breakeven point. You might not want to factor in predicted revenues. It all depends on how your accounting practice is defined. For example, if you predict sales of so and so volume in a particular month, then you have a predicted revenue figure. But the question is if you are going to sell your product for the same price during this month.
Once you have all your income listed out, all you need to do is simple math. If your costs are still outweighing your income, then you have not broken even. If your income is more, you’re profitable.
