A break-even analysis is used by businesses to determine when the business’ revenue equals their costs. This is an important analysis to make for start-up companies and new businesses, because it defines the point at which the business begins to become profitable. Unless the “break-even” point is reachable, it would not make sense to pursue the business endeavor. Thus, a proper business plan should include some form of a break-even analysis to help guide the company’s decisions.
A proper break-even analysis should cover points such as:
- Starting expenses, overhead, and fixed costs – These will make up the major expenses of the business, to be weighed against the profits and income.
- Revenue – This should be calculated according to sales generated each year or month. These need to be based on realistic income, not ideal figures.
- Various other figures – These figures include the amount of profit on sales, taxes, and other financial considerations.
All of the figures will be compared against one another to determine at what point the company will break even. This is a separate consideration from other goals, such as the amount of profit the company intends to make. Many figures and calculations may be estimates, especially if the business has not already started yet. Sometimes an existing business may need a break-even analysis when implementing new changes. In those cases, data from previous years can be used as well.
Break-even analyses can lead to various legal issues and disputes. These can include:
- Issues involving negligence (for instance, an analyst failing to exercise reasonable care in making financial projections)
- Mismanagement of funds, such as using company funds for personal uses
- Fraud and misrepresentation
- Breach of contract
- Violations of law, such as tax evasion and insider trading
Many of these legal issues can be involved, since the company’s budget involves a consideration of all the different costs and expenses. If the revenue and income is not reflected properly or accurately, it could lead to financial or legal troubles down the road.
In some cases, a lawsuit may be required in order to rectify the company’s losses. For instance, if an instance of fraud occurs with regards to the figures used, the company might face a loss of profits, as well as fines and other penalties. In such cases, the defendant party may be required to pay a damages award to help compensate for the losses they caused.
Break-even analyses can often be quite complex and may involve a whole range of different factors. You may need to hire a commercial attorney near you if you need any assistance with, or have any questions regarding a break-even analysis. Your attorney can help provide guidance during the process, to ensure that your business plan stays in line with local, state, and federal laws. Also, in the event of a legal dispute or conflict over a business plan, your lawyer can provide you with representation in a court of law.