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

What is an operational analysis of the enterprise? What is it used for? What allows you to find out?

general information

Operational analysis is aimed at identifying the dependence of the financial results of enterprises on sales volumes and costs. For it, the ratio of cost / volume / profit is used. Due to this, it is possible to determine the relationship between existing costs and revenues for various volumes of production. Operational analysis seeks to identify the most beneficial combination of variables. This approach is considered one of the most effective means of planning and forecasting the activities of the company. As an alternative to its designation, the phrase “CVP analysis” is also often used. This is most often seen in foreign literature. Analysis of operating activities has the following categories:

1. Production lever.
2. Breakeven point.
3. Stock of financial strength.
4. Marginal income.

Production lever

This indicator gives an idea of ​​how the profit will change if the sales proceeds change by one percent. Leverage is defined as the ratio of gross margin to profit. The greater the share of fixed costs, the more power he has. It should be noted that operational analysis and cost management provide not only the calculation of the coefficients, but also their correct interpretation. That is, conclusions should be drawn that will improve the situation in the future. Based on the obtained coefficients, probable scenarios for the development of the enterprise should be developed, 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, based on the coefficients, we can conclude which direction of the enterprise should be expanded and which should be minimized. CVP analysis also gives an idea of ​​the state of affairs, which is why its results are often attributed to commercial secrets of enterprises.

Breakeven point

This is the revenue or quantity of products, allowing to ensure full coverage of all existing costs and when there is zero profit. It can be found both analytically and graphically. Any change will result in a loss or gain. This is especially evident when using the graphical method. The analytical approach is more convenient in the matter of finding the value and relatively labor intensive. The breakeven point can be calculated not only for the entire enterprise, 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 determine operational analysis.

Margin of financial strength

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

safety margin = company revenue - profitability threshold (required in monetary terms).

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

Marginal income

Now let's look at the last category. In this case, the gross margin ratio is of interest to us. It is defined as the difference between revenue and variable costs. This coefficient is needed to characterize changes in gross sales committed in the current period in relation to the past. It can be used to judge how effectively a team of managers and analysts works. Additionally, on the basis of marginal income can be calculated coefficients of production costs for products sold and general and administrative costs.

Additional useful information

Operational analysis allows you to get a wide range of indicators, based on which you can effectively influence the final performance of the company. Among them should be noted:

1. The most profitable assortment in terms of implementation with a limited amount of resources.
2. Break-even sales.
3. The minimum selling price.
4. The ability to reduce prices while increasing sales.
5. The ability to track how structural changes 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 us to judge the minimum order values, which should be taken in the presence of certain circumstances.

What can I pay attention to?

For starters, I can recommend the book of authorship by I. Eremeev "Operational analysis as a basic element of the process of managing current costs: the CVP model." It is very well considered here how this approach allows us to evaluate the effectiveness of the organization, as well as to develop recommendations for improving indicators. This is not the only work that you can recommend reading. Also worth mentioning is A. Brown's book, Operational Analysis as an Approach to Pricing. Familiarization with this literature will allow us to understand, if not all, then at least the vast majority of aspects and nuances of using operational analysis. The authors attach the most important role to the indicator of marginal income. Then, the breakeven point value is calculated, the profitability threshold is searched for , the margin of safety is formed, and the operating lever is calculated . The more correct the decision made by the management is, the greater the economic effect the company will receive. Using operational analysis, you can determine the reserves, ensure their objective assessment and degree of use, get acquainted with the potential or actual shortage or abundance of resources in warehouses, and so on. This approach is operational and internal in nature, due to which it is possible to assess the real situation.

Conclusion

An integral part of operational analysis is a careful review 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, it is necessary to take into account the existing working conditions, influencing factors, long-term trend and many other variables. For the best result, the analysis is divided into separate stages, at each of which the specialist studies certain questions and provides answers to them. At the same time, it is necessary to observe the brink of the rational and not to work out them extremely scrupulously, because this will not ultimately give the desired result, but will require a lot of resources.