The term Survival Point, admirably translates the financial situation of the moment, and makes the conventional Deadlock, Balance point, leveling point and other break-even points seem somewhat insipid, so I decided to appropriate it.
The concept is old (the first reference I found appeared in a book on accounting technique published in 1948) and it is usually accompanied by the very classic diagram of straight lines that intersect at the nerve point.
Such a system is undoubtedly practical to grasp the concept, for example, quickly explaining to a group of sellers that the sale price has not only to cover the direct cost of the product, but also to help pay the operating expenses of the company. business. If the business reality were so simple and schematic, the cost classes would be a pleasant walk… Let us therefore try to eliminate the most obvious confusions of the traditional approach.
By volume, the number of units produced should not be understood but rather number of units sold (the difference between one data and another representing the variation between initial and final stocks). Otherwise, the relationship between Sales and Expenses would not be consistent. For this same reason, Fixed Expenses - I prefer to call them Structure Expenses - are those absorbed by the sales of the period, the eventually unabsorbed part thereof included in the value of the final inventory of finished products or in process.
Therefore we must stay tuned to! fact that, in this case, a part of the Structure Expenses is deferred (that depends on the costing system), since it is transformed into an asset item.
The term volume corresponds to a number of equivalent units - that is, most often virtual - since almost all companies sell more than a single product or service, the volume indicated on the abscissa of the diagram does not correspond to any of them in particular. In turn, these products or services do not necessarily come out at an even rate throughout the period. Therefore, the supposed equilibrium point coincides with an average level of operations whose balance can affect the significance.
A Fundamental difference in criteria can be noticed between Structure Expenses (poorly titled "fixed") and variable expenses - better titled Proportional Expenses.
- The former are expenses committed from the beginning of the period (most of the time they are predetermined), and charged as time goes by (even when there is no activity). The latter are charged according to the operations of the company.
In the graph, the crossing of two lines determines a Balance Point, while in practice several points can be calculated - or rather several thresholds - in accordance with the evaluation and decision criteria that are justified.
The graph is made from Profit and Loss elements (another abusive but usual term). However, modern financial management encompasses the proper management of all Funds, whether they are issued in the form of Expenses or in the form of Investments.
These characteristics lead us to conclude that the Equilibrium point graph can be used, with prudence, for didactic purposes, of an introductory nature. When trying to deepen the concept, I am convinced that the graphic presentation is insufficient. It is necessary to go to tabulations.
Note that the common key to all the breakeven point span approaches is the Contribution Margin, that is, the difference between Net Sales and the Proportional cost of the products sold. The greatest difficulty encountered at this point is to determine which costs and expenses are structural., and which are proportional.But here we must ignore the problem - it constitutes the essence of costing - and suppose that it has been solved in the example presented below (multiples of weights and percentages):
| Balance sheet | Thousands of pesos | % |
| Net sales | 23,808 | 100 |
| Less proportional cost of goods sold | 12,601 | 52.9 |
| Contribution margin | 11,207 | 47.1 |
| Less structure expenses | 6,164 | 25.9 |
| Generating funds in operations | 5,043 | 21.2 |
| Less out-of-pocket expenses (depreciation) | 1,377 | 5.8 |
| Accounting results in operations | 3,666 | 15.4 |
| Less financing costs (interest) | 1,308 | 5.5 |
| Result before income tax | 2,358 | 9.9 |
| Less income tax | 815 | 3.4 |
| Utility available | 1,543 | 6.5 |
We first see that for every $ 100 sold (line 01), we have $ 47.1 available to finance the operation of the company (line 03), which is the key to the calculation.
Accounting Survival Point: If lines 09, 10 and 11 were null, that is, the company would not suffer any loss while generating no profit, the expenses to be financed would sum (04) $ 6164 + (06) $ 1377 + (08) $ 1308 = $ 8849. The minimum sales to achieve this would be ($ 8,849 + 47.1) * 100 == $ 18,788, or +/- 79% of current sales. In other words, from $ 18,788 in sales, the company begins to generate profits.
Absolute Survival Point: In case of considering only the disbursed expenses, that is, abandoning the Depreciation, the items to be financed would be (04) $ 6164 and (08) $ 1308 = $ 7472. In this way, the minimum sales to cover at least the disbursements will be ($ 7,142 +47.1) * 100 == $ 15,864, or +/- 67% of current sales. In other words, from $ 15,864 in Sales, the company begins to generate funds, that is, to finance itself.
Self-financing point of operations. Management is also interested in determining the level of sales necessary to finance the operations of the company, regardless of the cost of financing it (financing is a responsibility other than the timely and profitable investment of available funds). In this case we add (04) $ 6164 + (06) $ 1377 - $ 7541 and the calculation gives us ($ 7541 + 47.1) * 100 = $ 16011 / that is +/- 67% of current sales. If the company had no debt, the company would survive on two-thirds of current sales.
There are obviously more possibilities for calculations, and this illustration only serves to extend the concept. These points, or Thresholds, can be very useful to anticipate the situation in the short term. Suppose to conclude, that at this moment the company still has undelivered customer orders - therefore, even without invoicing, not counting - for a value of $ 5,200.
If the cost proportion of the products is maintained, it will be possible to have an additional Contribution Margin of ($ 5,200 * 0 471) = $ 2,450 Adding it to the $ 11,207 already achieved, the Contribution Margin that can really be counted on is $ 13,657, which improves financial slack (subtracting, however, the additional provision for Income Tax).
In this case, Management may decide to accelerate the debt reduction, or acquire a more performing team in cash, or invest more funds in the promotional effort, or distribute a dividend to the owners of the capital, or even invest in listed securities.
Let your imagination run wild.
