Define: Adjusted Breakeven

Adjusted breakeven refers to a financial analysis technique used to determine the level of sales or revenue required for a business to cover all its costs and expenses, including both fixed and variable costs, and achieve a net profit of zero. It takes into account certain adjustments or modifications to the traditional breakeven analysis to provide a more accurate picture of a company’s financial health.

In a traditional breakeven analysis, only fixed costs and variable costs are considered. Fixed costs are those that do not change with the level of production or sales, such as rent, salaries, and insurance. Variable costs, on the other hand, vary with the level of production or sales, such as raw materials, direct labor, and sales commissions. The breakeven point is the level of sales at which total revenue equals total costs, resulting in zero profit or loss.

However, the adjusted breakeven analysis takes into account additional factors that can impact a company’s profitability. These adjustments may include the consideration of semi-variable costs, which are costs that have both fixed and variable components, such as utilities or maintenance expenses. It may also consider non-cash expenses, such as depreciation or amortization, which do not involve actual cash outflows but still affect the company’s profitability.

By incorporating these adjustments, the adjusted breakeven analysis provides a more comprehensive understanding of a company’s financial situation. It helps management determine the minimum level of sales required to cover all costs and achieve a desired level of profitability. This analysis is particularly useful for businesses with complex cost structures or those operating in industries with significant fixed or semi-variable costs.

Overall, the adjusted breakeven analysis is a valuable tool for businesses to assess their financial viability and make informed decisions regarding pricing, cost management, and sales targets. It provides a more accurate representation of a company’s breakeven point and helps identify areas for improvement or cost reduction.

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This glossary post was last updated: 29th March 2024.