BREAKEVEN ANALYSIS Meaning and
Definition
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Breakeven analysis is a financial and managerial tool used to determine the point at which a business's revenue equals its total costs, resulting in neither profit nor loss. It analyzes the relationship between sales volume, costs, and profits to ascertain the volume of sales or units needed to cover all expenses and start generating a profit.
In breakeven analysis, various components are taken into account, including fixed costs (expenses that remain constant regardless of sales volume) and variable costs (expenses that fluctuate with sales volume). The breakeven point is reached when total revenue equals the total of fixed and variable costs. At this point, a business neither makes a profit nor incurs a loss.
The breakeven analysis provides valuable insights for businesses in terms of making strategic decisions, such as setting prices, determining production levels, or evaluating the financial impact of changes in costs or sales volume. It helps businesses assess the risk and viability of a new venture or project and provides a benchmark to measure and track profitability.
Breakeven analysis is commonly employed in various industries, including manufacturing, retail, service, and healthcare. It is an essential tool for financial planning, budgeting, and decision-making, as it assists businesses in understanding their cost structures, pricing strategies, and profit potentials. By identifying the point at which a business becomes financially sustainable, breakeven analysis helps entrepreneurs and managers navigate the complexities of running a profitable venture.
Etymology of BREAKEVEN ANALYSIS
The word "breakeven analysis" is composed of two main components: "break-even" and "analysis".
The term "break-even" originated from the practice of determining the point at which a business becomes financially self-sustaining, where its total sales revenue equals its total costs. This term can be traced back to the early 20th century and is derived from the idea of "breaking even" or reaching the point of reaching neither a profit nor a loss.
The word "analysis" comes from the Greek word "analusis", which means "a breaking up" or "a loosening". It refers to the process of examining something in detail to understand its components, structure, or functioning.
So, the etymology of the term "breakeven analysis" combines the concept of reaching a point of financial equilibrium with the process of studying and understanding the factors that contribute to that equilibrium.
