FINANCIAL BREAK EVEN

The time period required or no of unit to be sold in the future to meet the total investment made by the investor on any portfolio or business is called the financial break even for that investment. This can also be termed as the period after which the business has began to make profits. The period before this the business was recovering the investment made on it. The higher the break even higher is the risk. It can also be defined as the period at which the cash out flow has been matched with the cash inflow.

The investor thus finds out the financial break even before making investment in any project. It gives a relationship between the sales, production, volume and cost. The break even point for various industries is found using thumb rule. According to thumb rule the principle can be easily learned and applied, thus financial break even can be easily learned and applied. The problem how ever with thumb rule is that accuracy will not be hundred percentages. The main advantage of break even analysis is that it helps the investor to understand the minimum requirement to overcome the loss.

The Financial break even is found by making various assumption they are,

• The average sales value of the goods sold remains constant.
• The average cost of the goods produced remains constant.

The limitations in financial break even analysis are

• Only one product can be analyzed at a time.
• The fixed cost cannot be easily differentiated from the variable cost.

Financial break even thus helps the investor to get a rough idea about the time period or the sales that he or she must make in order to achieve some profit out of the business. It therefore helps the investor whether to proceed with the investment or not. If the investor is able to cope up with the time period calculated from break even analysis then the investor can proceed with the investment, else can look for other investment mode. This analysis is used at the initial decision making stage. Financial break even how ever does not involve many parameters, so accuracy tends to be not so high.