The Limitations of Break-Even Analysis
- Break-even analysis provides valuable insights into the financial viability and performance of a business
- The sooner a business can reach break-even point, the more likely it is to survive and make a profit
- There are several limitations to the use of break-even analysis
Diagram Explaining the Limitations of Break-even Analysis
Break-even analysis is only useful if the data it is based on is accurate
- The limitations of break even analysis can be used to evaluate the usefulness of this tool for a start up or growing business
- The most significant limitation of break-even analysis, is that it is entirely dependent on the accuracy of the data used to construct it
- This data may be difficult to accurately calculate
- The data may be subject to frequent fluctuations, which can significantly impact the break-even level of output
- The data may require specialist knowledge/skills to gather, meaning that it is perhaps easier to be accurate in larger organisations than smaller ones
Exam Tip
When evaluating break-even analysis, ensure that you explain why it has an important internal planning role - but don’t forget that it has a significant external role too. Break even analysis should be included in a business plan when a business is trying to secure external finance. Businesses looking to borrow money or attract investors seeking to manage their risk should take care to model the break even point, margin of safety and level of profit (or loss) at different levels of output and be prepared to be scrutinised on the figures.
