In financial management what is the importance of completing

In financial management, what is the importance of completing a breakeven analysis? How does a breakeven analysis help organizations budget in the short and long term? How does the breakeven analysis connect revenues and expenses for specific initiatives?

Solution

Importance of completing a breakeven analysis:

A break even analysis tells management the minimum level of activity required to achieve a no-loss no- profit result from operattions. It also enables to find what the profit will be at a given output level. Thus it helps management to plan for profits.

Use in the short and long term.

In the long run, the BEP analysis helps to plan for profits. Projections of revenues, costs and resultant profit is possible for any level of activity. If a graph is used, it gives a birds eye view of cost-volume-profit relationships.

In the short run, the BEP analysis indicates how far away the firm is from the break even point; that is, how far sales can dip before the firm starts to make losses.

Connecting revenues and expenses for specific initiatives:

The costs are segregated into fixed and variable costs and incremental fixed and variable costs are matched with incremental revenues to asses the projects.