Question

so far we have been talking about businesses and profits.

But, is knowing the break-even point important only to for-profit businesses?
Do non-profit entities also need to know their break-even point (if they don't make a profit)? If yes, why? Can you explain with an example? (does not need to involve numbers)
[For example, Adelphi University is a nonprofit entity. Does it need to at least breakeven each year? If so, why?]

Answer 1

Definitley Yes is the answer.

The break even concept is traditionally associated with profit making businesses and is used to determine the level of sales needed to cover the costs of the business. However, the same techniques can be used to determine a non profit organization break even.

Suppose the financial projections template has been used to produce a financial model for a non profit operation which provides sports facilities to the local community,

The financial model shows that the organization plans to receive a fixed grant of 30,000 and intends to charge people who use the facility a subsidized rate of 3.00 per session. The variable costs of running the facility average 6.00 per session, and the annual fixed costs of the organization are 24,000.

Based on this information, and using the break even units formula, the non profit organization break even point calculation is as follows:

The first step is to realize that since the grant income is fixed at 30,000 it can be offset against the fixed costs of 24,000 to give an effective ‘fixed cost’ of -6,000. Using the non profit organization break even formula. Break even sessions = (Fixed costs - Grant income) / (Selling price – Variable cost) Break even sessions = (24,000 - 30,000) / (3.00 - 6.00) = 2,000 The calculation shows that the organization can afford to run 2,000 sessions in the year. At this level, the income statement would be presented as follows. Non profit organization break even income statement Total Grants 30,000 Session income (2,000 sessions @ 3.00) 6,000 Total income 36,000 Variable expenses (2,000 sessions @ 6.00) 12,000 Fixed expenses 24,000 Total expenses 36,000 Net income 0