The threshold of profitability and the system of indicators of operational analysis.

There are many methods that help in making both short-term and strategic decisions on the management of the enterprise. Perhaps one of the simplest among them is the operational analysis, which is also sometimes called a breakeven analysis. In the course of this process, there are definitions of such indicators as the amount of coverage, the threshold of profitability and some others.

The basis of this type of analysis is the division of the costs of the enterprise to produce products into variables and constants. The reason for this separation is that different costs behave differently when sales and production volumes change. Thus, the value of the variable costs calculated per unit of output is always constant, but their total amount varies in proportion to the volume of production. But the amount of fixed costs, on the contrary, is always constant, however their share in unit cost is inversely proportional to the number of products produced.

One of the most important indicators is the critical program. It is a volume of production in kind, which allows an enterprise to function without loss. The profitability threshold (breakeven point) is determined by multiplying the critical program by the price of the product. In other words, the profitability threshold is an indicator that characterizes the company's revenue level, in which break-even is achieved. Both these indicators can be determined both by studying the graph and analytically. Let us dwell in more detail on the second method.

To determine the critical program, it is required to find the quantity of products that must be produced and sold to cover the entire amount of fixed costs. Thus, it is enough to divide the sum of these most constant expenses by the difference between the price and the variable costs per unit. We should make a reservation that we proceed from the assumption that the enterprise sells exactly the same number of products as it produces. The revenue threshold, as already noted, can be found by multiplying the result in physical terms by the price.

Another indicator that requires close attention is the commercial margin. You can also see such names as the amount of coverage or the contribution to the coverage. This indicator is determined very simply, by reducing revenue by the amount of variable costs. Accordingly, the amount of coverage must cover fixed costs and generate profits. Note that the commercial margin is proportional to the volume of output, but per unit its value does not change. In this regard, often determine the proportion of the amount of coverage in the proceeds. Knowing this value, we can apply another method of calculating threshold revenue - we divide the fixed costs by the fraction of the coverage amount.

To determine how far the company is from unprofitability, calculate the amount of financial strength. It is determined by the difference between the revenue received from the sale of products and the profitability threshold. This indicator can also be calculated as a share of revenue.

The last indicator that I would like to consider is the operational leverage. He describes the degree of production risk, showing how many times the profit of the enterprise changes in comparison with the change in revenue. Calculating it is extremely simple and consists in relation to the commercial margin to profit. The risk, which is estimated by this indicator, is related to the fact that there is a constant part in the cost of production. This risk is greater the closer the company works to the break-even point. With the increase in revenue, the firm's activity becomes more and more safe from this point of view, since the share of fixed costs is steadily declining.

The calculations described above are carried out taking into account the assumption that all the dependencies are linear. Of course, real interactions are much more difficult, and, for example, the actual threshold of profitability may differ from the one found, but for the basic analysis the described methods can be applied quite calmly.