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

What is an operational analysis of an enterprise? What is it used for? What can I learn?

general information

Operational analysis is aimed at identifying the dependence of financial results of enterprises on sales volumes and costs. For him, the cost / volume / profit ratio is used. Due to this, it is possible to determine the interrelations between existing costs and incomes for different volumes of production. Operational analysis is aimed at finding 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 term "CVP-analysis" is often used for its designation. This is most often found in foreign literature. The analysis of operating activities has the following categories:

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

Production lever

This indicator gives an idea of how the profit will change if sales revenue changes by one percent. The production lever is defined as the ratio of gross margin to profit. The more specific the 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, it is necessary to draw conclusions that will improve the situation in the future. Based on the obtained coefficients, it is necessary to develop probable scenarios for the development of the enterprise, where the final results will be calculated over a certain time interval. To do this, we should look for the most favorable relationship between variables and constant costs, the volume of production and the price of products. Also, based on the coefficients, one can draw a conclusion about which direction of the company's activity should be expanded and which should be curtailed. Also CVP-analysis gives an idea of the state of affairs, because of what its results are often referred to as commercial secrets of enterprises.

Breakeven point

This is the revenue or quantity of products that allow to ensure full coverage of all existing costs and when there is a zero profit. Can be found both analytically and graphically. Any change will lead to the fact that there will be a loss or profit. This is especially evident when using the graphical method. The analytical approach is more convenient in the matter of finding the value and relative to the spent laboriousness. The breakeven point can be calculated not only for the whole 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 more this indicator, the more profitable the company. And this all allows us to determine the operational analysis.

Stock of financial strength

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

Stock of financial strength = revenue of the company - threshold of profitability (mandatory 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 receives. Therefore, it is necessary to make strategic and tactical decisions reasonably and carefully. The stock of financial strength also allows you to find out which insurance pillow the enterprise 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 required to characterize the change in the volume of gross sales made in the current period in relation to the past. On it it is possible to judge how effectively the team of managers and analysts works. In addition, on the basis of margin income, the coefficients of the production cost for the products sold and the total and administrative costs can be calculated.

Additional useful information

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

1. The most profitable in terms of implementation range with limited resources.
2. Break-even sales.
3. The minimum selling price.
4. The opportunity to reduce prices while increasing the volume of sales.
5. The ability to see how the structural shifts in the range affect the profit of the enterprise.
6. Solving problems by the type of purchase / production of parts and / or semi-finished products.

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

What can you pay attention to?

For starters, you can advise the author's book 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 to evaluate the efficiency of the organization's work, as well as to develop recommendations for improving the indicators. This is not the only work with which you can recommend reading. Also worth mentioning is A. Braun's book "Operational Analysis as an Approach to Pricing." Familiarization with this literature will make it possible to understand, if not all, at least in the overwhelming majority of aspects and nuances of using operational analysis. The authors pay the most important role to the indicator of marginal revenue. Then, the break-even point is calculated, the profitability threshold is sought , the safety margin is generated, and the operating lever is calculated . The more correct is the decision made by the management, the greater the economic benefit the enterprise will receive. With the help of operational analysis, you can determine the 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, so you can assess the real state of affairs.

Conclusion

An inseparable part of the operational analysis is a careful examination and study of the cost structure of the enterprise. It is not possible to give specific recommendations here (even if we consider not the whole economy, but only one branch). To optimize the ratio, it is necessary to take into account existing working conditions, influencing factors, long-term trend and many other variables. For the best result, the analysis is divided into separate stages, on each of which the specialist is engaged in the study of certain questions and the provision of answers to them. At the same time, it is necessary to observe the boundary of the reasonable and not to work out them extremely scrupulously, because this will not ultimately produce the desired result, but it will require a lot of resources.