Break Even Point - Analysis of Survival During Tough Times
Would You Know If You Are Losing Money During Low Business Volumes?
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | April 05, 2015
Business owners are obsessed with revenue generation and profit retention and hospitality stake holders are no exception. A sustained stream of profitability is what these investors like best. And so management has its work cut out. The problem is unless management is clued in on the direction their enterprise is taking, often, they are confronted with nasty surprises. One of the most critical pieces of information for management on their business performance is whether they are "losing money" as the often-ambiguous term goes. But knowing this is easier said than done. Enter the principle of break even.
What is Break Even Point?
If profitability is the holy grail of business performance, then keeping it sustained becomes the paramount goal. However, a key point often overlooked is how you will recognize if you are losing money. Here losing money is used in the context of determining whether you are on path for profits or are likely to suffer losses.
Losses can be roughly called: Revenues minus expenses, when expenses are higher than revenues. How is this related to the break-even concept? Break even broadly measures at what level of business volume in your operation do your revenues equal expenses. Why is this so important?
One of the most fundamental of concepts in performance measurement in general and profitability in particular is determining at what level of the capacity does the operation break even - that is, revenues and expenses are level. This is simply because, the higher the level of capacity an operation breaks even, the less the potential for future profits there is.
Let us use an illustration: