Article Type: Research Article Article Citation: Lis Sintha Oppusunggu. (2020). IMPORTANCE OF BREAK-EVEN ANALYSIS FOR
THE MICRO, SMALL AND MEDIUM ENTERPRISES. International Journal of Research
-GRANTHAALAYAH, 8(6), 212-218. https://doi.org/10.29121/granthaalayah.v8.i6.2020.502 Received Date: 08 May 2020 Accepted Date: 30 June 2020 Keywords: CVP Analysis Break-Even Point Medium Enterprises The current behaviour of Small and Medium Enterprises has to face many problems and the survey are predicted, 47 per cent of Small and Medium Enterprises stop trying. One of the causes is that there are still many small and medium businesses, from the beginning of opening their business up to now, they have never carried out an analysis of profit and loss calculations and a comprehensive calculation of how many product units should be made so that the business returns on capital by looking at production factors or resources used. Break-even analysis is a financial tool that helps decide at what stage a company, or new service or product, will be profitable, which is a financial calculation to decide the number of products or services that a company must sell to cover its costs (especially fixed costs). This research paper is the application of the theoretical concepts of CVP Analysis, Break-Even Point a powerful tool for planning and decision making. highlight costs, quantities sold and prices, which are the company's financial information.
1. INTRODUCTIONIn this
globalization era, the world economy is experiencing crisis, challenges and
obstacles which are quite alarming and felt by several countries. Almost all
businesses feel the impact of the coronavirus outbreak, social constraints
cause various business activities must be done remotely, so, many workers work
from home (work from home).
Based on the results of a survey carried out several institutions and the
Ministry of Small and Medium
Enterprises, Corona outbreaks virus has a big
impact on the survival of Small and Medium Enterprises, must now face a pretty big problem and
forecast the survey, 47 per cent of Small and Medium Enterprises stop trying [1], [2]. One cause is the Small and Medium Enterprises are
constrained on the supply side due to disruption of distribution during a
pandemic Covid-19 and the weakness further depress demand-side sustainability
of Small and Medium Enterprises in the
country [3], [4], [5]. Besides, there are still many small and medium businesses from the
beginning of opening their businesses up to now have never done an analysis of
profit and loss calculations and a comprehensive calculation of how many
product units should be made so that the business returns on capital by looking
at production factors or resources used.
To maintain the
sustainability of the company's life in the face of economic conditions this
requires good managerial management. Management required to coordinate all
available resources effectively and efficiently and can make managerial
decisions to support the achievement of the company is to maximize profit
through the amount sold, the unit cost and the selling price. Managing the
company's profit or loss is very important to accelerate the company's
profitability. From income statement, clearly defined the position
of finance companies so that managers can reduce unnecessary
costs and increase revenue. Break-even point is the point where the company generates
an amount of profit equal to the cost of the production process in
the accounting period. Because income and expenses are the same, the
net profit for the period is zero. Break-even analysis is also a
way to find out the minimum sales volume so that a business does not suffer
losses, but also has not yet made a profit (in other words the profit is equal
to zero). In the break-even point analysis requires information about sales
and costs incurred. The concept of break-even point can be applied in all
businesses and any industry, whether large or small. This paper provides
several financial management strategies based on the theories and findings from
previous studies. 2. LITERATURE REVIEWMicro, Small and
Medium Enterprises are trading businesses managed by business entities or
individuals that refer to productive economic businesses following the criteria
stipulated by Law Number 20 the Year 2008. In the Indonesian economy, Micro,
Small, and Intermediate is the business group that has the largest number
and Small and Medium Enterprises is more resilient to various kinds of
economic crisis shocks [8], [9], [10]. The business criteria included in
Small and Medium Enterprises have been regulated in a legal umbrella based on
the law. Although the business scale targeted by Small and Medium
Enterprises businesses is not as large as a
large- scale enterprise, many people are comfortable doing business
at this level because of the advantages offered to micro and small and
medium-sized businesses and these advantages are difficult to obtain at the
giant business level [11], [12], [13]. One of the main advantages is the ease of
adopting innovation in business, especially in the field of technology. The
adoption of the latest technology has become easier to do to increase the
growth of Small and Medium Enterprises businesses because it does not have a
complicated bureaucracy and complicated systems [14], [15]. In addition to the
ease of technology application, excellence in employee relations factors is due
to its smaller scope, and the flexibility to adapt the business to dynamic
market conditions [16], [17], [18]. To improve the competitiveness of SMEs in
Indonesia, Michael Porter state that there are 3 strategies must be carried
out, namely: a) Cost leadership - Trying to win the competition by approaching
prices, wherewith certain prices for the products it produces consumers are
more interested in buying these products; b) Differentiation (Product Unique) -
To win the business competition, the company tries to make a unique product,
where the product is difficult for the company's competitors to imitate; and c)
Focus/Competitive Strategy - This strategy focuses activities on consumers with
certain segments. Targeting this particular segment of consumers will make it
easier for companies to win the business competition. Break-even point is a point where
the cost or expenses and revenue are balanced so there is no loss or gain [18], [19]. In other words, that is the point where the company has neither
profit nor loss. Perform analysis of break-even point is analyzing the tool
company managers in the company's production costs. In a simple analysis of the
breakeven point can give out the information about whether revenue product can
cover the costs relevant n of the product. Management can use this information
to make various business decisions, including setting prices, preparing
competitive bids, and applying for loans [19], [20], [21]. Likewise, with the managerial concept, the break-even
analysis seeks to find the appropriate amount of output so that no loss is
incurred. The manager can determine the minimum amount of sales in which the
company does not suffer losses. If a product cannot cover its costs, it will
reduce the company's profitability. Profitability is the
goal of every business owner. But before management can make a profit, the
company must break even. Many other factors affect the financial health of a
company over time, such as projected changes in market conditions. Break-even
analysis as a basis can provide an idea of where a business is at
a certain point in time, which must be used in conjunction with other financial
stages. Break-even analysis can be mem provide important preliminary
information about the business status of the company [22], [23], [24]. If the results of the analysis reveal that
sales are not enough to cover costs, or that the contribution margin is smaller
than they should, management can take action to lower the breakeven point. The
pre-market analysis is the main step that needs to be taken before applying
breakeven because of its many environmental influences [25], [26], [27]. Zaroni said that Cost-Volume-Profit Analysis (CVP)
is a very useful model for planning and management decision making in
determining units to be sold to achieve desired profits. CVP
analysis illustrates the relationship between units sold, costs,
selling prices, and profits, which can explain some important issues in
management decisions such as the impact of reducing total fixed costs on
profits, the impact of policies on increasing product selling prices on profits,
and others. Managers can use CVP analysis for sensitivity analysis of
several alternative scenarios due to the risk of changes in selling prices,
changes in fixed costs, changes in variable costs, and changes in tax rates. CVP analysis is formulated
from the simple concept of profit calculation. Profit is calculated from
the reduction between total revenue (total revenue) and total costs
(total cost). In the break-even condition, profit is
zero, then: Profit = Total
Revenue - Total Cost Profit = (Proce x
Quantity) - Variable Cost - Fixed Cost Profit = (P x Q) -
(vc x Q) - FC In the break-even
condition, profit equals zero, then: Profit = (P x Q) -
(vc x Q) - FC = 0 (P - vc) Q = FC Q = Note: vc = Variable
cost per unit FC = Fixed
cost The CVP analysis
formula above is used to determine how many units should be sold at break-even or
profit conditions equal to zero. Unit of measurement of sales units varies
greatly, depending on the type and characteristics of the product or service
provided by the company. The operating income
method focuses on revenue ratios as a useful tool in managing fixed costs and
variable costs. P densities can be expressed as exponential equations: Operating
Income = Sales Revenue - Variable Costs - Fixed Costs. Specifically,
revenue from sales is the selling price per unit, multiplied by
the number of units sold. In this term, the operating income for
the formula is: Operating
Income = (price x number of units) - (variable cost per unit x number of
units) - fixed total costs. The refinement of
the operating income method is the contribution level method. Just pay
attention that at the break-even point, the total contribution of the margins
is the same to improve expenditure. Contribution margins represent revenue from
sales minus total variable costs. If we replace the entity's contribution
margin with price, minus the variable unit cost, and we solve it per unit
figure, we will get the following equation for profitability: Number of units =
Fixed Cost - Contributions to unit Figure 1: Break-Even Point Description: 1)
Flat
growth (unit) shows sales volume that can be expressed in units of quantity or
rupiah sales revenue. 2)
The
vertical axis (Y) shows revenue and cost of sales in rupiah 3)
Creating
a sales line is as follows: At sales volume equals zero and
income equals zero. A straight line is then drawn to connect the
points x = 0 and y = 0. 4)
Lane
construction is still being done because there are no fixed
costs in any sales volume 5)
certain
capacity changes. 6)
The
break-even point is located at the point of intersection of the sales revenue
line with the coastline 7)
The area
to the left of the breakeven point, that is the area between the total cost
line and 8)
the
sales revenue line is the area of loss, because sales revenue is
lower than the total cost, while the area to the right of the breakeven,
the area between sales revenue and total 9)
the
costs line is the profit area because sales revenue is higher than the total
costs. 3. RESEARCH METHODThis research is a
literature study, and it was done at Universitas Kristen
Indonesia, Jakarta. The instrument of this study is the researcher itself
as the key instrument. The research data analysis used is the descriptive
technique, were to answer the research problem, the researcher research read
the theories which are related to the topic of this research “Importance of Break-Even Analysis For the Micro, Small and Medium Enterprises”
sourced from books, journals and proceedings and other previous researches
which were analyzed descriptively. 4. RESULT AND DISCUSSIONBased on some of the
opinions above, it can be concluded that the break-even analysis is a tool used
to determine the break-even point of the company where the company does
not experience losses and does not get profits. Break-even analysis
can be seen the minimum revenue that must be achieved by the company to
get the targeted profit for the following year. Break-even analysis
is a financial tool that helps determine at what stage a company, or new
service or product, will benefit. In other words, this is a financial
calculation to determine the number of products or services that a company must
sell to cover its costs (especially fixed costs). Break-even is a
situation where the company does not make money or lose money, but
all costs have been overcome. Analysis point of breakeven useful
in studying the relationship between variable costs, fixed costs and
revenues. Generally, companies with low fixed costs will have a break-even
point of sale [6], [18], [28]. Starting a new
business - If you want to
start a new business, break-even analysis is a must. Not only does it help
in deciding whether the idea of starting a new one is feasible,
but it will make management to be realistic about costs,
and determine the pricing strategy [29], [30]. Making new products - In the case of
existing businesses, management must continue to break-even analysis
before launching new products, especially if such a product will add
significant expenditure. Change business model - If you are going to
change your business model, for example, switching from a wholesale business to
a retail business, you still have to break-even analysis. Costs can change a
lot and this will help find out the selling prices that need to be changed too.
Uses of Breakeven Analysis: a)
Assisting to determine the capacity of the unemployed once
the breakeven point is reached. This will help to show
the maximum profit in certain products/services that can be
produced; b) Assisting to determine
the effect on changes the profit due to the fixed costs of replacing the
variable costs); c) Assisting to determine
the changes in profit if the price of a product is changed, and d) Assisting to determine the amount of
loss that can be sustained if there is a decline in sales [31], [32]. Besides, break-even
analysis is very useful for knowing the overall business ability to generate
profits. The company which approached the breakeven point of maximum sales
level, this indicates that it is almost impractical for businesses to profit
even under the best of circumstances. Therefore, it is management's
responsibility to monitor the breakeven point continuously in several ways,
namely by using: Price analysis - Minimize or eliminate the use of coupons or
other price reduction offers, because such promotional strategies increase
breakeven; Technology analysis - Implement technology that can improve
business efficiency, thereby increasing capacity without additional costs; Cost
analysis - Review all fixed costs constantly to verify whether anything can
be eliminated and review the total variable costs to see if they can
be eliminated. This analysis will increase margins and reduce breakeven
points; Margin Analysis - Increasing sales
of goods with the highest margins (high contribution income) and pay attention
to product margins, thereby reducing breakeven points; Outsourcing - If
an activity consists of fixed costs, try to outsource such activities (if possible),
which reduces the breakeven point [33], [34]. Companies that do an
analysis the breakeven point would be (a) Catching spending is lost because k
ethical thinking about the new business and all plans of finance will be
inspected to determine the breakeven point of his. This analysis certainly
limits the amount of unexpected expenditure. (b) set target revenue, it will be
known how many products are needed for on-sale to make it profitable. This will
help the sales team to set more concrete sales goals. (c) developing smarter
decisions, the entrepreneur often makes decisions concerning their business is
not based on emotion but a decision that is based on facts. (d) the finance
business is a key component in any business plan. Usually, a requirement if the
company wants outsiders to fund its business. to get funds from outside the
company, the company must be able to prove that the plans of companies feasible
(e) the establishment of a better price, by finding the breakeven will assist
in determining the price of the products better. This tool is very used to
provide the best price of a product that can make a maximum profit without
increasing the existing price. (f) cover fixed costs: Performing a
break-even analysis helps to cover all fixed costs. 5. CONCLUSIONFactors that can
affect the level of profit obtained by a company, namely: (1) Total costs
incurred to produce products/services that are reflected by the cost of goods
sold (2) Number of goods/services produced and sold, and (3) the selling price
of the goods concerned so that the company's management must try to control
these three things. Thing else that needs to be noticed is that all goods
produced can be sold. To determine income, it is assumed that the goods
produced are sold out entirely. In the factors that affect the level of profit,
management can reduce costs to the minimum cost level. On the other hand, the
sales volume of goods/services can be increased to the maximum level, so that
the goods produced are sold out. Determination of the selling price is
determined by achieving an adequate level of profit per unit so that the
selling price can be reached by the public-consumer. The effort of the
company/management to look for profit must be based on how many items must be
produced and then sold. In the production planning stage, company
management must determine in advance the minimum production level so that
the company does not lose. In other words, the initial stage
of production planning must be based on efforts not to lose or
break even. The purpose of breakeven is the company's total revenue
(total revenue) is equal to the total costs incurred (TR -TC). SOURCES OF FUNDINGNone. CONFLICT OF INTERESTNone. ACKNOWLEDGMENTNone. REFERENCES
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