How do you update and monitor break-even analysis and profitability index over time?

1 What is break-even analysis?

Break-even analysis is a method of calculating the minimum amount of sales or units that a project or a product needs to sell to cover its costs. It helps you determine the level of output or revenue that is required to achieve zero profit or loss. It also shows you the margin of safety, which is the difference between the actual or expected sales and the break-even sales. The higher the margin of safety, the lower the risk of losing money.

2 What is profitability index?

Profitability index is a ratio that compares the present value of the future cash flows of a project or a product to its initial investment. It helps you measure the return on investment or the net present value per unit of cost. It also shows you the relative profitability of different projects or products. The higher the profitability index, the more attractive the project or product is.

3 How to update break-even analysis?

To update break-even analysis, you need to be aware of the fixed costs, such as rent, salaries, and depreciation, as well as the variable costs, such as materials, labor, and utilities. Additionally, you need to know the selling price per unit of output or sales. The formula for break-even point is: Fixed costs / (Selling price - Variable costs). As the fixed costs, selling price, and variable costs change, you must recalculate the break-even point. For instance, if the fixed costs increase, the break-even point will also increase. Conversely, if the selling price decreases or the variable costs decrease, the break-even point will increase.

4 How to update profitability index?

In order to update the profitability index, you must be aware of the initial investment, future cash flows, and discount rate. The formula for the profitability index is the present value of future cash flows divided by the initial investment. To keep the index up to date, you must monitor the changes in these variables and recalculate the profitability index accordingly. For instance, if the initial investment increases, the profitability index will decrease, whereas if the future cash flows increase, the profitability index will increase. On the other hand, if the discount rate increases, the profitability index will decrease.

5 How to use break-even analysis and profitability index for decision making?

Break-even analysis and profitability index can help you make better decisions for your business, such as whether to launch or continue a project or product, how much output or sales you need to make a profit or avoid a loss, and how to compare the profitability of different projects or products. To use these tools for decision making, you need to consider the accuracy and reliability of your data and assumptions, the trade-offs and constraints of your situation, and the objectives and preferences of your stakeholders. You should use realistic and updated numbers and scenarios for your calculations, weigh the benefits and costs of each option, and account for the limitations and risks of your resources and environment. Additionally, you should align your decisions with the goals and values of your customers, employees, investors, and partners.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?