## Break even point

It measures the time required time to recover your investment.

**Calculation steps:**

- Identify the total cost of the project
- Identify the total value of the benefits of the project
- Divide the cost by the benefit

**Example 1:**

First, let’s use a simpler version of the example described also in the case of ROI & Cost benefit ratio KPIs

**Initiative: **Leadership program for management team

**Objective:** Reduce turnover rate with 10%

**Costs:** Trainer + associated logistic costs = 30.000

**Previous year turnover cost:** 1.25 mil

**Benefit** = 10% out of 1.25 mil = 125.000

**Break even point **= 30.000 / 125.000 = 0.24 => **3 months **

**Main limitations of the formula:**

**It assumes that the costs occur entirely at the beginning of the project****It assumes that the benefit inflow is the same every month/year**

**Example 2:**

We will use the same example as in the case of ROI, Cost benefit ratio

**Initiative:** Leadership program for management team

**Objective:** Reduce turnover rate with 10%

**Costs:** Trainer + associated logistic costs = 30.000

**Course details:** Time investment of 8 hours/month during 12 months

**Participants:** 30 managers with an average pay of 60 / hour

**Previous year turnover cost**: 1.25 mil

**Program effect:** 3 years at the current turnover cost

To make the calculation easier we will assume:

- The project starts in January. This way, all the costs are in the first year.
- The effect starts with the same year of implementation

**Cost calculation:**

We have 2 main costs:

- Trainer + associated logistic costs: 30.000
- Operational cost: Managers time spent in the course: 30 (managers) x 8 (hours/month) x 12 (months) x 60 (hourly cost) = 172.800

**Total cost: 202.800**

**Benefit** **Calculation: **

10% out of 1.25 mil = 125.000 * 3 years = **375.000**

**To be able to calculate the Break even point we need to be able to calculate additional metrics.**

According to the above, the data looks like:

**Table interpretation:**

**Cashflow:**

- Is calculated by adding the Costs (Project cost and Operational Cost) to the Benefits (note that in accounting the costs are negative values)
- In the first year we have a negative cashflow because the costs are higher than the benefit
- In the second and third year the cashflow is equal to the benefit because there are no costs

**Cumulative value:**

- Is calculated by adding the previous year cashflow with the current year cashflow
- We can see that:
- In the first year the cumulative value is negative which means the we have a loss. This loss will be subtracted from the second year benefit
- In the second year the cumulative value is positive. This means that at the end of the year the costs are covered and we have a profit of 47.200
- The cumulative value for the third year is actually the real benefit of the project and it’s called
**Net profit**(see more about the net profit in the ROI calculation)

Looking at the data table we can see that the break even point occurs in the second year. We have to identify when do the second year benefit in flow covers the 77.800 loss from the previous year.

To do so we have to use the formula:

**Break even point = last negative cumulative value / (cashflow value of the year with positive cumulative value / days or months in a year) **

In our case we have: 77.800 / (125.000 / 12) = 7.46 => **break even point = 1 year and 7.46 months. This means that at the end of month 8 of the second year the loss is fully covered and we will have a small profit. **

##### This content can only be accessed by members with a subscription

Or pick the package that suits you best:

## Member

**More than 40 HR KPI’s explained**- Limited access to best practices
- A learning hub that grows
- Access to our promotions
- One account

**3 months of full access if you subscribe until 31st of May**

**3 months of full access if you subscribe until 31st of May**

## Professional

**More than 200 HR KPI’s explained**- Full access to best practices
- Full access to new content
- Access to our promotions
**One account**- 12 months subscription

Join Now

## Corporate

**More than 200 HR KPI’s explained**- Full access to best practices
- Full access to new content
- Access to our promotions
**Unlimited accounts**- 12 months subscription

Join Now