Confidence from Simplifying Uncertainty

Quick Insight

Doing nothing from fear of the unknown means lost opportunities. How can you decide whether to proceed without taking on too much risk?  Breakeven analysis provides a reality check for investments you make in your business.

I've built dozens of projections for new products or locations. When I ask someone how much they'll sell, they usually answer, "I don't know." That's very true. You have to make many uncertain estimates. You rarely know how much new product you will sell or what sales will be at a new location. 

Doing nothing from fear of the unknown means lost opportunities. How can you decide whether to proceed without taking on too much risk?

A breakeven analysis calculates how much income you need to cover your expenses. Breakeven analysis provides a reality check for any investment you make in your business. 

Breakeven analysis simplifies the question by figuring out the least amount of sales needed to cover your expenses. It's much easier to answer whether you can exceed the sales needed to break even than to guess your future sales. 

Breakeven also reduces the range of options being decided on. I’ve often modeled a range of scenarios when planning new locations or divisions. The number of outcomes and the probability of each can be overwhelming. Breakeven analysis simplifies a decision to one scenario with a straightforward yes/no question: "Can we do better than the minimum needed for success?"

Are you considering a major investment? Use breakeven analysis as a starting point for analyzing it.

I wish you confidence despite uncertainty. I wish you well.

- Rob Stephens

Further Insight

CFO Perspective Resources

  • Video: Break-Even Analysis - I apply break-even analysis to the decision of whether to open a new location to show how it can help you make better decisions.
  • Video: Using Excel Goal Seek For Break-Even Analysis - Excel makes finding the break-even point very easy with its Goal Seek function. You can use this function to set the value of any formula to a number you want by changing the value of one of the source cells for the formula. I’ll walk you step-by-step through how to find the breakeven using Goal Seek. I’ll also show how to get the Goal Seek tool if you use Google Sheets.
  • Course: Analyzing Whether to Add New Locations - A new location is a major commitment of time and money with the potential to expand a company’s business and increase profits. New locations also come with risks. I'll give you step-by-step guidance on how to decide whether a new location will increase profits or destroy value.
  • Course: Marginal Profitability Analysis - Marginal Profitability Analysis provides relevant decision information for setting prices, product design and product profitability. The course provides practical examples of making decisions with marginal profitability analysis.

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