Operational analysis as an element of cost management. CVP analysis. Breakeven point

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

What is the operational analysis of the enterprise? What is it used for? What allows you to know?

General information

Operational analysis is aimed at identifying the dependence of the financial results of enterprises on sales volumes and costs. It uses the cost/volume/profit ratio. Thanks to this, it is possible to determine the relationship between existing costs and incomes at different volumes of production. Operational analysis aims to discover the most beneficial combination of variables. This approach is considered one of the most effective means of planning and forecasting the company's activities. As an alternative, the phrase "CVP analysis" is also often used to refer to it. This is most often found in foreign literature. Operations analysis has the following categories:

1. Production lever.
2. Break-even point.
3. Financial safety margin.
4. Marginal income.

Production Lever

This indicator gives an idea of how profit will change if sales revenue changes to onepercent. Production leverage is defined as the ratio of gross margin to profit. The greater the share of fixed costs, the more power it has. It should be noted that operational analysis and cost management involve not only the calculation of coefficients, but also their correct interpretation. That is, conclusions should be drawn that will improve the situation in the future. Based on the coefficients obtained, it is necessary to develop probable scenarios for the development of the enterprise, where the final results will be calculated for a certain time period. To do this, you should look for the most favorable ratio between variable and fixed costs, production volume and product price. Also, on the basis of the coefficients, it is possible to draw a conclusion about which direction of the enterprise's activity should be expanded and which should be curtailed. Also, CVP-analysis gives an idea of the state of affairs, which is why its results are often referred to as a trade secret of enterprises.

Break-even point

This is the revenue or quantity of production that allows full coverage of all existing costs and when there is zero profit. Can be found both analytically and graphically. Any change will result in a loss or profit. This is especially evident when using the graphical method. The analytical approach is more convenient in terms of finding the value and in terms of the labor involved. The break-even point can be calculated not only for everythingenterprises, but also for certain types of services and products. As soon as the actual revenue begins to exceed the threshold, the company makes a profit. The higher this indicator, the more profitable the company. And all this allows us to define operational analysis.

Financial safety margin

This parameter indicates how much the actual revenue is above the profitability threshold. A search for the difference between the actual and threshold sales volumes can also be carried out. This allows you to talk about how much the company needs to sell products in order to maintain its work at the current level, as well as find out how much you can reduce its cost if you need to compete. To determine this coefficient, the following formula is used:

margin of financial strength=company revenue - profitability threshold (necessarily in monetary terms).

In a market economy, the answer to the question of how much an enterprise will prosper depends on the amount of profit it receives. Therefore, it is necessary to make reasonable and balanced strategic and tactical decisions. The margin of financial strength will allow you to find out what kind of insurance cushion the company has in case of an error.

Marginal income

Now let's look at the last category. In this case, we are interested in the gross margin ratio. It is defined as the difference between revenue and variable costs. This coefficient is needed to characterize the change in the volume of gross sales madein the current period relative to the past. It can be used to judge how effectively the team of managers and analysts is working. Additionally, production cost factors for products sold and general and administrative costs can be calculated based on marginal revenue.

Additional useful information

Operational analysis allows you to get a wide range of indicators, on the basis of which you can effectively influence the final performance of the company. Notable among them are:

1. The most profitable assortment in terms of implementation with a limited amount of resources.
2. Break-even sales.
3. Minimum selling price.
4. Possibility of price reduction while increasing sales volume.
5. The ability to track how structural shifts in the assortment affect the profit of the enterprise.
6. Solving problems by type of purchase/production of parts and/or semi-finished products.

Also, the use of operational analysis allows you to judge the minimum order values, which should be taken under certain circumstances.

What can I look out for?

For starters, we can recommend the book by I. Eremeev "Operational analysis as a basic element of the process of managing current costs: the CVP model." Here it is very well considered how this approach allows you to evaluate the performance of the organization, as well as develop recommendations for improvement.indicators. This is not the only work that can be recommended to read. We should also mention A. Brown's book "Operational Analysis as an Approach to Pricing". Familiarization with this literature will allow you to understand, if not all, then at least the vast majority of aspects and nuances of using operational analysis. The authors pay the most important role to the indicator of marginal income. Then the break-even point value is calculated, the profitability threshold is searched, a margin of safety is formed, and the operating leverage is calculated. The more correct the decision made by the management, the greater the economic effect the enterprise will receive. With the help of operational analysis, you can identify reserves, ensure their objective assessment and degree of use, get acquainted with the potential or real shortage or abundance of resources in warehouses, and so on. This approach is operational and internal in nature, making it possible to assess the real state of affairs.

Conclusion

An integral part of operational analysis is a careful consideration and study of the cost structure of the enterprise. It is not possible to give specific recommendations here (even if we consider not the entire economy, but only one industry). To optimize the ratio, the operating conditions, the influencing factors, the long-term trend and many other variables must be taken into account. For the best result, the analysis is divided into separate stages, at each of which the specialist is studyingcertain questions and providing answers to them. At the same time, one should observe the edge of reason and not work them out extremely scrupulously, because this will not ultimately give the desired result, but will require a lot of resources.