 ## Break even point

It measures the time required time to recover your investment.

Calculation steps:

1. Identify the total cost of the project
2. Identify the total value of the benefits of the project
3. 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:

1. Trainer + associated logistic costs: 30.000
2. 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.

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