Breakeven

Question 1

Why is breakeven analysis important

Answer 1

Focuses entrepreneur on how long it will take before a startup reaches profitability
Helps entrepreneur understand the viability of a business idea
Shows whether a business idea is too optimistic about profit and the risk of making loss before it occurs
Illustrates the importance of a startup keeping fixed costs down to a minimum higher fixed costs equals higher break even output
Shows the entrepreneur how to maximize profit and ensure it occurs faster

Question 2

What are the limitations of a break even analysis?

Answer 2

It is based on a forecast nothing is certain
It only measures one price level most businesses sell products with a range of prices
It does not take into account external factors that impact break even analysis such even analysis such as the economy supply is changing their prices consumer demand fluctuating competition opening up

Question 3

Margin of safety

Answer 3

The difference between forecast output and the break even output
This helps us to know how many sales can be lost before the business is at risk of going into loss the greater the margin of safety the better calculation equals actual sales minus break even point