How can CVP (Cost-Volume-Profit Analysis) Analysis be helpful when starting a new business?
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Start up stage is just as important as any other management stage in an organization. It is through startup that an organization sets precedents in all its operations and the activities that it hopes to perform. One crucial precedent that assists entrepreneurs to set good management principles in an organization is by adopting the CVP or cost-volume-profit analysis. As part of unraveling the essence of CVP, This outline will note its importance especially in new business startups showing an interlink between its existence as an accounting principle and how it is applied by organizations. The report will also advise entrepreneur on why they should consider using the concept when making their startups.
Machuga & Smith (2013) define cost-volume-profit analysis as the study that examines the impact of changes between the costs, the volumes and their relationship which leads to the overall objective of most organizations which is profit making (P. 179). Each of the three aspects in the phrase has different aspects that they communicate. For cost, an organization has different types of costs, which could be fixed and variable. The costs determine the feasibility as they reflect on the output or the volumes that an organization makes. In return, the volumes determine the profits that an organization realizes.
Cadden & Schneider (2014) note, for new startups, an organization has to consider the balance of the three aspects as they determine whether they should choose to pursue certain projects. Normally, costs should be at the minimum while the volume should be at its maximum. In such a case, there should be no compromise to other aspects such as the quality of the products and the services. Therefore, through understanding this relationship, an organization can fashion its own production model for the sake of the (volume) that assures the maximum profits while can position an organization at a platform of reducing its costs (P. 3). In a case when an organization is opting to make investments in raising awareness or promoting its services through the marketing campaigns or supporting charity events. Such a consideration sets a pace on the effect that such campaigns may have different product profiles or the individuals that such a company is targeting. The level of commitment that a company may have to make as shown in the CVP also determines the options that the company should choose.
Most startup rely on information created by other organization or publications made by experts, it is no wonder most business consultants advise entrepreneurs to use this model since it factors into aspect such as uncertainty. Aspects such as fixed costs may be easy to anticipate. However, for aspects such as the variable costs, an organization has to be keen to establish a balance of the figures and its financial ability. The same goes for the volumes. There is no system that is a hundred percent perfect to assure productivity to always be at the maximum without flaws. Moreover, A CVP analysis assists an organization to anticipate for such problems hence cushioning it for incidences such as low productivity or technical failures. This simply means an organization has several options to choose.
The essence of the CVP is also visible in decision-making and evaluating options. At its initial stages, a business relies on setting a base by making sound decisions all with the aim of harmonizing its operations. For example, whenever an organization has several product lines or services that they offer, they can use a contribution margin analysis and decide whether they should prioritize on a certain business. Other options that could assist an organization to decide on whether their financial constraints and investment options are viable are break-even analysis and the operating leverage. It is no wonder entrepreneurs are creating business plans as their manifestos that will monitor what they set and hope should reflect in their investment returns.