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Break-even analysis

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Definition of Break-even analysis

Break-even Analysis Image 1

Break-even analysis

An analysis of the level of sales at which a project would make zero profit.


Break-Even Analysis

An analytical technique for studying the relationships between fixed cost, variable cost, and profits. A breakeven chart graphically depicts the nature of breakeven analysis. The breakeven point represents the volume of sales at which total costs equal total revenues (that is, profits equal zero).


break-even analysis

analysis of the level of sales at which the company breaks even.



Related Terms:

activity analysis

the process of detailing the various repetitive actions that are performed in making a product or
providing a service, classifying them as value-added and
non-value-added, and devising ways of minimizing or eliminating
non-value-added activities


BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.


Break

A rapid and sharp price decline.



Break-Even

This is a term used to describe a point at which revenues equal costs.


break-even chart

a graph that depicts the relationships among revenues, variable costs, fixed costs, and profits (or losses)


Break-even Analysis Image 2

Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.


Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.


break-even point (BEP)

the level of activity, in units or dollars, at which total revenues equal total costs


Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.


Break-even time

Related: Premium payback period.


Breakeven point

The point at which total costs equal total revenue, i.e. where there is neither a profit nor a loss.


breakeven point

The annual sales volume level at which total contribution
margin equals total annual fixed expenses. The breakeven point is only a
point of reference, not the goal of a business, of course. It is computed by
dividing total fixed expenses by unit margin. The breakeven point is
quite useful in analyzing profit behavior and operating leverage. Also, it
gives manager a good point of reference for setting sales goals and
understanding the consequences of incurring fixed costs for a period.


Breakeven point

The sales level at which a company, division, or product line makes a
profit of exactly zero, and is computed by dividing all fixed costs by the average
gross margin percentage.


Breakout

A rise in a security's price above a resistance level (commonly its previous high price) or drop
below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing
move in the same direction. Can be used by technical analysts as a buy or sell indicator.


Break-even Analysis Image 3

capital investment analysis

Refers to various techniques and procedures
used to determine or to analyze future returns from an investment
of capital in order to evaluate the capital recovery pattern and the
periodic earnings from the investment. The two basic tools for capital
investment analysis are (1) spreadsheet models (which I strongly prefer)
and (2) mathematical equations for calculating the present value or
internal rate of return of an investment. Mathematical methods suffer
from a lack of information that the decision maker ought to consider. A
spreadsheet model supplies all the needed information and has other
advantages as well.


Cash-flow break-even point

The point below which the firm will need either to obtain additional financing
or to liquidate some of its assets to meet its fixed costs.



Cluster analysis

A statistical technique that identifies clusters of stocks whose returns are highly correlated
within each cluster and relatively uncorrelated between clusters. Cluster analysis has identified groupings
such as growth, cyclical, stable and energy stocks.


Common-base-year analysis

The representing of accounting information over multiple years as percentages
of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.


Comparative credit analysis

A method of analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.


correlation analysis

an analytical technique that uses statistical
measures of dispersion to reveal the strength of the
relationship between variables


Cost-Benefit Analysis

The calculation and comparison of the costs and benefits of a policy or project.


cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)


cost driver analysis

the process of investigating, quantifying,
and explaining the relationships of cost drivers and
their related costs


Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.


Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk


credit analysis

Procedure to determine the likelihood a customer will pay its bills.



Deal Breaker

A deal breaker is a significant issue relating to the proposed financing between the prospective investor and the entrepreneur that needs to be resolved in order to close the deal.


Discriminant analysis

A statistical process that links the probability of default to a specified set of financial ratios.


Evening up

Buying or selling to offset an existing market position.


Event risk

The risk that the ability of an issuer to make interest and principal payments will change because
of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural
or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.


Event study

A statistical study that examines how the release of information affects prices at a particular time.


Events of default

Contractually specified events that allow lenders to demand immediate repayment of a debt.


Factor analysis

A statistical procedure that seeks to explain a certain phenomenon, such as the return on a
common stock, in terms of the behavior of a set of predictive factors.


Failure analysis

The examination of failure incidents to identify components
with poor performance profiles.


Fictitious Revenue

Revenue recognized on a nonexistent sale or service transaction.


Financial Trend Analysis

Process of analyzing financial statements of a company for any continuing relationship.


Fundamental analysis

Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.


Group of seven (G7/G-7)

The G-5 countries plus Canada and Italy.


Horizon analysis

An analysis of returns using total return to assess performance over some investment horizon.


Horizontal analysis

The process of dividing each expense item of a given year by the same expense item in
the base year. This allows for the exploration of changes in the relative importance of expense items over time
and the behavior of expense items as sales change.


incremental analysis

a process of evaluating changes that
focuses only on the factors that differ from one course of
action or decision to another


incremental revenue

the revenue resulting from an additional contemplated sale


Industrial revenue bond (IRB)

Bond issued by local government agencies on behalf of corporations.


Internal Revenue Code

Refers to all federal tax laws as a group.


Internal Revenue Service

A federal agency empowered by Congress to interpret and enforce tax-related laws.


least squares regression analysis

a statistical technique that investigates the association between dependent and independent variables; it determines the line of "best fit" for a set of observations by minimizing the sum of the squares
of the vertical deviations between actual points and the
regression line; it can be used to determine the fixed and
variable portions of a mixed cost


Mean-variance analysis

Evaluation of risky prospects based on the expected value and variance of possible outcomes.


Multiple-discriminant analysis (MDA)

Statistical technique for distinguishing between two groups on the
basis of their observed characteristics.


NET SALES (revenue)

The amount sold after customers’ returns, sales discounts, and other allowances are taken away from
gross sales. (Companies usually just show the net sales amount on their income statements, omitting returns, allowances, and the like.)


Pareto analysis

a method of ranking the causes of variation
in a process according to the impact on an objective
Pareto inventory analysis an analysis that separates inventory
into three groups based on annual cost-to-volume usage


Pareto analysis

The 80:20 ratio that states that 20% of the variables included in an
analysis are responsible for 80% of the results. For example, 20% of all customers
are responsible for 80% of all customer service activity, or 20% of all inventory
items comprise 80% of the inventory value.


Performance attribution analysis

The decomposition of a money manager's performance results to explain
the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What
were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was
market timing statistically significant? And (4), Was security selection statistically significant?


Premature Revenue

Revenue recognized for a confirmed sale or service transaction in a period
prior to that called for by generally accepted accounting principles.


prevention cost

a cost incurred to improve quality by preventing
defects from occurring


Pro forma capital structure analysis

A method of analyzing the impact of alternative capital structure
choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will
be able to use projected tax shield benefits fully.


Ratio analysis

A method of analysing financial reports to interpret trends and make comparisons by using ratios – two numbers, with one generally expressed as a percentage of the other.


Ratio analysis

A method of relating numbers from the various financial statements to one another in order to get meaningful information for comparison.


Ratio Analysis

The process of using financial ratios, calculated from key accounts
found in a company's financial statements, to make judgements
concerning the finances and operations of the firm


Realizable Revenue A revenue transaction where assets received in exchange for goods and

services are readily convertible into known amounts of cash or claims to cash.


Realized Revenue

A revenue transaction where goods and services are exchanged for cash or
claims to cash.


Regression analysis

A statistical technique that can be used to estimate relationships between variables.


Regression analysis

Statistical analysis techniques that quantify the
relationship between two or more variables. The intent is quantitative
prediction or forecasting, particularly using a small population to forecast the
behavior of a large population.


Revenue

Income earned from the sale of goods and services.


Revenue

Amounts earned by the company from the sale of merchandise or services; often used interchangeably with the term sales.


Revenue

An inflow of cash, accounts receivable, or barter from a customer in exchange
for the provision of a service or product to that customer by a company.


Revenue bond

A bond issued by a municipality to finance either a project or an enterprise where the issuer
pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital
revenue bonds and sewer revenue bonds.


revenue center

a responsibility center for which a manager is accountable only for the generation of revenues and has no control over setting selling prices, or budgeting or incurring costs


revenue-driven expenses

Operating expenses that vary in proportion to
changes in total sales revenue (total dollars of sales). Examples are sales
commissions based on sales revenue, credit card discount expenses, and
rents and franchise fees based on sales revenue. These expenses are one
of the key variables in a profit model. Segregating these expenses from
other types of expenses that behave differently is essential for management
decision-making analysis. (These expenses are not disclosed separately
in externally reported income statements.)


Revenue fund

A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.


Revenue Recognition

The act of recording revenue in the financial statements. Revenue should
be recognized when it is earned and realized or realizable.


Sales Revenue Revenue recognized from the sales of products as opposed to the provision of

services.


Scenario analysis

The use of horizon analysis to project bond total returns under different reinvestment rates
and future market yields.


scenario analysis

Project analysis given a particular combination of assumptions.


Sensitivity analysis

analysis of the effect on a project's profitability due to changes in sales, cost, and so on.


Sensitivity analysis

An approach to understanding how changes in one variable of cost–volume–profit analysis are affected by changes in the other variables.


sensitivity analysis

a process of determining the amount of change that must occur in a variable before a different decision would be made


sensitivity analysis

analysis of the effects of changes in sales, costs, and so on, on project profitability.


Service Revenue

Revenue recognized from the provision of services as opposed to the sale of
products.


simulation analysis

Estimation of the probabilities of different possible outcomes, e.g., from an investment project.


Technical analysis

Security analysis that seeks to detect and interpret patterns in past security prices.


Total revenue

Total sales and other revenue for the period shown. Known as "turnover" in the UK.


Unearned revenue

Money that has been paid by customers for work yet to be done or goods yet to be provided.


Unearned revenue

A payment from a customer that cannot yet be recognized as earned
revenue, because the offsetting service or product for which the money was paid has
not yet been delivered.


Variance analysis

A method of budgetary control that compares actual performance against plan, investigates the causes of the variance and takes corrective action to ensure that targets are achieved.


variance analysis

the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences


Vertical analysis

The process of dividing each expense item in the income statement of a given year by net
sales to identify expense items that rise faster or slower than a change in sales.


VERTICAL ANALYSIS

A financial analysis technique that relates key amounts on the income statement and balance sheet to a 100 percent or base figure for the present and previous year.
It shows the percentage change from last year to this year, making it easier to spot problems that require analysis.


fixed expenses (costs)

Expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. Fixed operating costs provide capacity to carry on
operations and make sales. Fixed manufacturing overhead costs provide
production capacity. Fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.



 

 

 

 

 

 

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