UNIT-4

Marketing Environment is the combination of external and internal factors and forces which
affect the company’s ability to establish a relationship and serve its customers.

The marketing environment of a business consists of an internal and an external environment.

The internal environment is company-specific and includes owners, workers, machines,
materials etc. The external environment is further divided into two components: micro &
macro. The micro or the task environment is also specific to the business but external. It
consists of factors engaged in producing, distributing, and promoting the offering. The macro
or the broad environment includes larger societal forces which affect society as a whole. The
broad environment is made up of six components: demographic, economic, physical,
technological, political-legal, and social-cultural environment.

Components of Marketing Environment

The marketing environment is made up of the internal and external environment of the
business. While the internal environment can be controlled, the business has very less or no
control over the external environment.
Internal Environment
The internal environment of the business includes all the forces and factors inside the
organisation which affect its marketing operations. These components can be grouped under
the Five Ms of the business, which are:

 Men
 Money
 Machinery
 Materials
 Markets
The internal environment is under the control of the marketer and can be changed with the
changing external environment. Nevertheless, the internal marketing environment is as
important for the business as the external marketing environment. This environment includes
the sales department, marketing department, the manufacturing unit, the human resource
department, etc.

External Environment
The external environment constitutes factors and forces which are external to the business
and on which the marketer has little or no control. The external environment is of two types:

Micro Environment
The micro-component of the external environment is also known as the task environment. It
comprises of external forces and factors that are directly related to the business. These
include suppliers, market intermediaries, customers, partners, competitors and the public

 Suppliers include all the parties which provide resources needed by the organisation.
 Market intermediaries include parties involved in distributing the product or service
of the organisation.
 Partners are all the separate entities like advertising agencies, market research
organisations, banking and insurance companies, transportation companies, brokers,
etc. which conduct business with the organisation.
 Customers comprise of the target group of the organisation.
  Competitors are the players in the same market who targets similar customers as that
of the organisation.
 Public is made up of any other group that has an actual or potential interest or affects
the company’s ability to serve its customers.
Macro Environment
The macro component of the marketing environment is also known as the broad environment.
It constitutes the external factors and forces which affect the industry as a whole but don’t
have a direct effect on the business. The macro-environment can be divided into 6 parts.

Demographic Environment
The demographic environment is made up of the people who constitute the market. It is
characterised as the factual investigation and segregation of the population according to
their size, density, location, age, gender, race, and occupation.

Economic Environment
The economic environment constitutes factors which influence customers’ purchasing power
and spending patterns. These factors include the GDP, GNP, interest rates, inflation, income
distribution, government funding and subsidies, and other major economic variables.

Physical Environment
The physical environment includes the natural environment in which the business operates.
This includes the climatic conditions, environmental change, accessibility to water and raw
materials, natural disasters, pollution etc.

Technological Environment
The technological environment constitutes innovation, research and development in
technology, technological alternatives, innovation inducements also technological barriers to
smooth operation. Technology is one of the biggest sources of threats and opportunities for
the organisation and it is very dynamic.

Political-Legal Environment
The political & Legal environment includes laws and government’s policies prevailing in the
country. It also includes other pressure groups and agencies which influence or limit the
working of the industry and/or the business in the society.

Social-Cultural Environment
The social-cultural aspect of the macro-environment is made up of the lifestyle, values,
culture, prejudice and beliefs of the people. This differs in different regions.

Importance of Marketing Environment

Every business, no matter how big or small, operates within the marketing environment. Its
present and future existence, profits, image, and positioning depend on its internal and
external environment. The business environment is one of the most dynamic aspects of the
business. In order to operate and stay in the market for long, one has to understand and
analyze the marketing environment and its components properly.
Essential for planning
An understanding of the external and internal environment is essential for planning for the
future. A marketer needs to be fully aware of the current scenario, dynamism, and future
predictions of the marketing environment if he wants his plans to succeed.
Understanding Customers
Thorough knowledge of the marketing environment helps marketers acknowledge and predict
what the customer actually wants. In-depth analysis of the marketing environment reduces
(and even removes) the noise between the marketer and customers and helps the marketer to
understand consumer behaviour better.
Tapping Trends
Breaking into new markets and capitalizing on new trends requires a lot of insight about the
marketing environment. The marketer needs to research about every aspect of the
environment to create a foolproof plan.

Threats and Opportunities

Sound knowledge of the market environment often gives a first-mover advantage to the
marketer as he makes sure that his business is safe from future threats and taps the future
opportunities.
Understanding the Competitors
Every niche has different players fighting for the same spot. A better understanding of the
marketing environment allows the marketer to understand more about the competitions and
about what advantages do the competitors have over his business and vice versa.

Consumer / Buyer Behaviour:

Consumer behaviour is the study of how individual customers, groups or organizations select,
buy, use, and dispose ideas, goods, and services to satisfy their needs and wants. It refers to
the actions of the consumers in the marketplace and the underlying motives for those actions.

Marketers expect that by understanding what causes the consumers to buy particular goods
and services, they will be able to determine—which products are needed in the marketplace,
which are obsolete, and how best to present the goods to the consumers.

The study of consumer behaviour assumes that the consumers are actors in the marketplace.
The perspective of role theory assumes that consumers play various roles in the marketplace.
Starting from the information provider, from the user to the payer and to the disposer,
consumers play these roles in the decision process.

The roles also vary in different consumption situations; for example, a mother plays the role
of an influencer in a child’s purchase process, whereas she plays the role of a disposer for the
products consumed by the family.

Some selected definitions of consumer behaviour are as follows:

1. According to Engel, Blackwell, and Mansard, ‘consumer behaviour is the actions and
decision processes of people who purchase goods and services for personal consumption’.

2. According to Louden and Bitta, ‘consumer behaviour is the decision process and physical
activity, which individuals engage in when evaluating, acquiring, using or disposing of goods
and services’.

Nature of Consumer Behaviour:

1. Influenced by various factors:
The various factors that influence the consumer behaviour are as follows:
a. Marketing factors such as product design, price, promotion, packaging, positioning and
distribution.

b. Personal factors such as age, gender, education and income level.

c. Psychological factors such as buying motives, perception of the product and attitudes
towards the product.

d. Situational factors such as physical surroundings at the time of purchase, social

surroundings and time factor.

e. Social factors such as social status, reference groups and family.

f. Cultural factors, such as religion, social class—caste and sub-castes.

2. Undergoes a constant change:

Consumer behaviour is not static. It undergoes a change over a period of time depending on
the nature of products. For example, kids prefer colourful and fancy footwear, but as they
grow up as teenagers and young adults, they prefer trendy footwear, and as middle-aged and
senior citizens they prefer more sober footwear. The change in buying behaviour may take
place due to several other factors such as increase in income level, education level and
marketing factors.

3. Varies from consumer to consumer:

All consumers do not behave in the same manner. Different consumers behave differently.
The differences in consumer behaviour are due to individual factors such as the nature of the
consumers, lifestyle and culture. For example, some consumers are technoholics. They go on
a shopping and spend beyond their means.

They borrow money from friends, relatives, banks, and at times even adopt unethical means
to spend on shopping of advance technologies. But there are other consumers who, despite
having surplus money, do not go even for the regular purchases and avoid use and purchase
of advance technologies.

4. Varies from region to region and country to county:

The consumer behaviour varies across states, regions and countries. For example, the
behaviour of the urban consumers is different from that of the rural consumers. A good
number of rural consumers are conservative in their buying behaviours.

The rich rural consumers may think twice to spend on luxuries despite having sufficient
funds, whereas the urban consumers may even take bank loans to buy luxury items such as
cars and household appliances. The consumer behaviour may also varies across the states,
regions and countries. It may differ depending on the upbringing, lifestyles and level of
development.

5. Information on consumer behaviour is important to the marketers:

Marketers need to have a good knowledge of the consumer behaviour. They need to study the
various factors that influence the consumer behaviour of their target customers.
The knowledge of consumer behaviour enables them to take appropriate marketing
decisions in respect of the following factors:
a. Product design/model

b. Pricing of the product

c. Promotion of the product

d. Packaging

e. Positioning

f. Place of distribution

MARKETING MIX

Marketing mix theory, first coined by E. Jerome McCarthy in 1960’s, is one of the basics of
marketing for anyone to run a successful business.

But before explaining the definition or the parts of the theory, let us look at this example of
Coca Cola

Case Study: Coca Cola, being one of the most valued brands in the world,
 Has a well-diversified portfolio of 3500+ products.
 Operates in around all countries of the world but two and distributes its products with
a help of franchise system.
 All of its products are priced keeping in mind the competitors (since FMCG industry
works mostly in a perfect competition), and
 Has adopted various promotion strategies during till now (eg Christmas
advertisements, I’d like to buy the world a coke ad, etc and also certain CSR activities)
This is the traditional marketing mix. It’s simple. Put the right product at the right time, with
the right price tag, and promote it in the right way. And you will be the champion.

Definition:

Marketing mix is the set of tactics a business use to promote and sell its products in the
market. These tactics range from developing the product, deciding its price and places where
it will be sold, to deciding its communication and promotional strategies.

The tactics are further divided into 4Ps – Product, Price, Place, and Promotion. However,
nowadays, the marketing mix constitutes several other Ps like Process, People and physical
evidence as vital mix elements.
Product mix
Product is an item produced or procured by the business to satisfy the needs of the customer.
It is the actual item which is held for sale in the market. The product can be tangible or
intangible (it can be a good or a service). It is not necessary that the business produce the
product. It can also procure it from somewhere else.

Product mix refers to the mix of all the products present in the company for sale. (Just like
the coca cola example above. All the 3500+ products constitute the product mix of the
company.)

Every product has a definite life cycle. A life cycle of the product constitute different stages a
product undergoes from the time it was first thought to the time it is finally removed from the
market.

Price Mix
Price is the actual amount which the consumer pays for the product. It is a result of various
factors which include profits of the company, segment targeted, subsidies, discounts, supply-
demand, and the cost of other three P’s of the marketing mix.

This aspect determines the company’s survival in the market. Hence price has a great effect
on the entire marketing mix.

Price mix influence the positioning of the product among competition as well as the
customer’s perception of the product. Hence businesses usually use one of these three
strategies for pricing –

 Penetration Pricing (low price kept to capture market share)

 Skimming Pricing (high price initially then lowering of price)
 Competition Pricing (pricing at par of competition)
The price decides where will product stand among the competition.

Place Mix
A product, until it is well placed / distributed to reach the customer, is of no use to the
customer. Hence, Place Mix is important. Business should be clear about their target market
and how to reach the same. Place mix constitute strategies of where and how the product will
be available for the customers for the actual sale.

Distribution Strategies include

 Intensive Distribution (Cover as much market as you can. E.g. Surf Companies)
 Selective Distribution (For premium products. Open limited outlets. E.g. Zara)
 Exclusive Distribution (For more exclusive products. Very less outlets. E.g.
Lamborghini)
 Franchise system (Small companies distribute on your behalf. E.g. Coca-Cola)
A business can also decide between direct and indirect distribution.

Direct Distribution – When the business sell directly to the customers without involving any
intermediaries.

Indirect Distribution – When the business involves intermediaries in their distribution

strategy.

Promotion Mix
Promotion leads and follows every other P’s of the mix. It’s through this aspect is how the
business let know customers about their product. Promotion leads to brand recognition.

Promotion includes

 Advertising
 Branding
 Personal Selling
 Sales Promotion
 Public Relations
 Direct Marketing, and
 Social Media Outreach
These mediums helps the business to transfer the idea of the product from the company to the
customer.

The Other 3 P’s

In addition to these 4 Marketing Mix P’s, modern marketers have added 3 more P’s to the
marketing mix of services. These are
 People
 Process
 Physical Environment

7 Ps
Advertising  and Sales Promotion!

Advertising is as old as trade and commerce. The ancient Babylonians and the Romans

contributed significantly to the early growth of advertising. The nineteenth century saw the

introduction of magazines which also grew into a big advertising medium. The modern day

of advertisement agency has its origins during this period.

Starting as agents for newspapers, the agency diversified into other services such as copy-

writing, and played the role of consultants to advertisers. This marked the beginning of the

modem-day, full service and agency. The early twentieth century was the golden age of
advertising. The great depression of the 1930’s saw a temporary setback in advertising

growth.

However, there were some positive developments during this period such as the introduction

of radio as an advertising medium and the application of research in advertising. The positive

developments during 1950’s were the emergence of television, the application of psychology

and research in advertising, and invention of the concept of Unique Selling Proposition (USP)

by Reeves. The decade 1960-1970, ushered in a creative revolution in advertising.

Outstanding personalities like David Ogilvy, Leo Burnett and Bernbach etc. emphasized the

creative side of advertising and developed campaigns that stood out for their creative

brilliance.

The decade 1910-1980 is referred to as the positioning era, as it saw the emergence of the

concept of positioning developed by Ries and Trout. This concept has wide application in

advertising today. The present era is aptly named the era of accountability. There is greater

for truthful advertising for measuring the effectiveness of advertising in general, and for

socially responsible advertising.

In India, advertising, as a potent means of sales-promotion, was accepted hardly three

decades ago. This delay is obviously attributable to its late “industrialization”. But today,

India too has emerged into an industrial country, giving boost to “advertisements” that appear

regularly, in local and national newspapers magazines, periodicals, TV etc. These days

people use “Advertising” in various walks of life.

Manufacturers use large-scale advertising for impressing people with the utility of their

products. Businessmen advertise inviting individuals to invest money in their concerns.

Employers advertise for applications for various vacancies in their companies for selecting

the best of the applicants. The unemployed persons advertise their readiness to serve. In this

manner, “advertising” has become indispensable in modem life.

Definition:
Littlefield defines it as “Advertising is mass communication of information intended to

persuade buyers as to maximize profits.”

Basic Features:

After a careful scrutiny of the above definitions, the essential elements of advertising

can be listed as follows:

1. Matter of Record:

It is a matter of record furnishing information for the benefit of buyers. It guides or helps

buyers to make satisfactory purchases. The contents of an advertisement are what the

advertiser wants.

2. Non-personal Communication:

It is a mass non-personal communication, reaching large groups of buyers. It is not delivered

by actual person. It is not addressed to a person. Whatever the form of advertisement-spoken,

written or visual, it is directed at a mass audience and not at the individual as in personal

selling.

3. Persuasion of Buyers:

Advertising complements or may substitute for personal selling. To persuade the buyers the

advertiser makes his products buyer-satisfying. It is an art of influencing the human action to

possess one’s product.

4. Paid Form of Publicity:

Advertising is a paid form and hence commercial in nature. Thus any sponsored

communication designed to influence buyer’s behaviour is advertising because advertiser

pays for it.

5. Identifiable with the Sponsor:

Advertising is identifiable with its sponsoring authority or advertiser. It discloses or identifies

the source of opinions and ideas, it presents.

Advertising and Publicity:

Advertising is defined as any paid form of non-personal presentation and promotion of ideas,

goods or services by an identified sponsor. “Publicity” has been defined by American

Marketing Association as “non-personal stimulation of demand for a product, service or

business unit by planting commercially significant news about it in a published medium or

obtaining favourable presentation of it on radio, television or stage that is not paid for by the

sponsor.”

To be brief, both, advertising and publicity make a non-personal presentation to the masses.

Tell the aspects of product like quality, price, usefulness, special features etc. The advertiser

has to pay for advertisement. In case of publicity, it is not a necessity. For instance in

election, the expenses of popularizing a candidate may or may not be paid by the candidate.

Advertising is a purposeful attempt sponsored by the party, whereas publicity may or may not

be sponsored by the party. It means, in publicity, the person passing the message may not

come to the stage: someone or a third person initiates the publicity; for instance good or bad

remarks appearing in newspapers about anything-a film, a book, a policy, an adventure etc.

Advertising is a method of publicity. In other words, publicity involves a number of methods

including advertising.
 Advertising Objectives:

Personal selling and other forms of promotions are supported by advertisement. It is the main

objective. The long-term objectives of advertising are broad and concerned with the

achievement of overall company objectives.

1. To do the entire selling job (as in mail order marketing).

2. To introduce a new product (by building brand awareness among potential buyers).

3. To force middlemen to handle the product (pull strategy).

4. To build brand preference (by making it more difficult for middlemen to sell substitutes).

5. To remind users to buy the product (retentive strategy).

6. To popularize some change in marketing strategy (change in price, improvement in the

product etc.).

7. To provide rationalization (i.e., socially acceptable excuses).

8. To combat or neutralize competitor’s advertising.

9. To improve the morale of dealers and/or sales people (by showing that the company is

doing its share of promotion).

10. To acquaint buyers and prospects with the new uses of the product (to extend the

product’s life cycle).

Importance of Advertising:

The standard of living of the public is raised by introducing modern products and the latest

techniques through advertising. Mass production followed by large-scale consumption

facilitates to earn more profits. Large- scale production decreases the unit cost. The selling

price is also reduced, but not to the extent of decreased cost of production.

It means, the price of the product is decreased, thereby consumers are satisfied and dividend

rate is increased, thereby shareholders are satisfied. All these happen because of advertising.

Items like, pens, radios, scooters, watches, refrigerators, television sets, cameras, foot-wares

and many other modem amenities are examples. Advertising reaches the masses, whereas

salesmen find it difficult. Advertising covers a vast area. In the field of competition,

advertising is a good helper to the producer to boost his products.

Sales promotion refers to ‘those marketing activities that stimulate consumer shows and

expositions.

Purchasing and dealer effectiveness such as displays, demonstration and various non-

recurrent selling efforts not in the ordinary routine.” According to A.H.R. Delens: “Sales

promotion means any steps that are taken for the purpose of obtaining an increasing sale.

Often this term refers specially to selling efforts that are designed to supplement personal

selling and advertising and by co-ordination helps them to become more effective.”

In the words of Roger A. Strong, “Sales promotion includes all forms of sponsored

communication apart from activities associated with personal selling. It, thus includes trade

shows and exhibits, combining, sampling, premiums, trade, allowances, sales and dealer
incentives, set of packs, consumer education and demonstration activities, rebates, bonus,

packs, point of purchase material and direct mail.”

Objectives of Sales Promotion:

Sales promotion is a vital bridge or a connecting link between personal selling and

advertising.

Sales promotion activities are undertaken to achieve the following objectives:

1. To increase sales by publicity through the media which are complementary to press and

poster advertising.

2. To disseminate information through salesmen, dealers etc., so as to ensure the product

getting into satisfactory use by the ultimate consumers.

3. To stimulate customers to make purchases at the point of purchase.

4. To prompt existing customers to buy more.

5. To introduce new products.

6. To attract new customers.

7. To meet competition from others effectively.

8. To check seasonal decline in the volume of sales.

Importance of Sales Promotion:

The importance of sales promotion has increased tremendously in the modern times. Lakhs of

rupees are being spent on sales promotional activities to attract the consumers in our country

and also in other countries of the world.

Some large companies have also begun to appoint sales promotion managers to handle

miscellaneous promotional tools. All these facts show that the importance of sales promotion

activities is increasing at a faster rate.

Financial Management:

Book Keeping:

The term bookkeeping means different things to different people:

 Some people think that bookkeeping is the same as accounting. They assume that
keeping a company's books and preparing its financial statements and tax reports are
all part of bookkeeping. Accountants do not share their view.
 Others see bookkeeping as limited to recording transactions in journals or daybooks
and then posting the amounts into accounts in ledgers. After the amounts are posted,
the bookkeeping has ended and an accountant with a college degree takes over. The
accountant will make adjusting entries and then prepare the financial statements and
other reports.
 The past distinctions between bookkeeping and accounting have become blurred with
the use of computers and accounting software. For example, a person with little
bookkeeping training can use the accounting software to record vendor invoices,
prepare sales invoices, etc. and the software will update the accounts in the general
ledger automatically. Once the format of the financial statements has been
established, the software will be able to generate the financial statements with the
click of a button.
 At mid-size and larger corporations the term bookkeeping might be absent. Often
corporations have accounting departments staffed with accounting clerks who process
accounts payable, accounts receivable, payroll, etc. The accounting clerks will be
supervised by one or more accountants.

the bookkeeping for small businesses usually began by writing entries into journals. Journals
were defined as the books of original entry. In order to reduce the amount of writing in a
general journal, special journals or daybooks were introduced. The special or specialized
journals consisted of a sales journal, purchases journal, cash receipts journal, and cash
payments journal.
The company's transactions were written in the journals in date order. Later, the amounts in
the journals would be posted to the designated accounts located in the general ledger.
Examples of accounts include Sales, Rent Expense, Wages Expense, Cash, Loans Payable,
etc. Each account's balance had to be calculated and the account balances were used in the
company's financial statements. In addition to the general ledger, a company may have had
subsidiary ledgers for accounts such as Accounts Receivable.
Handwriting the many transactions into journals, rewriting the amounts in the accounts, and
manually calculating the account balances would likely result in some incorrect amounts. To
determine whether errors had occurred, the bookkeeper prepared a trial balance. A trial
balance is an internal report that lists 1) each account name, and 2) each account's balance in
the appropriate debit column or credit column. If the total of the debit column did not equal
the total of the credit column, there was at least one error occurring somewhere between the
journal entry and the trial balance. Finding the one or more errors often meant spending hours
retracing the entries and postings.
After locating and correcting the errors the bookkeeping phase was completed and the
accounting phase began. It began with an accountant preparing adjusting entries so that the
accounts reflected the accrual basis of accounting. Adjusting entries were necessary for the
following reasons:
 additional revenues and assets may have been earned but were not recorded
 additional expenses and liabilities may have been incurred but were not recorded
 some of the amounts that had been recorded by the bookkeeper may have been
prepayments which are no longer prepaid
 depreciation and other non-routine adjustments needed to be computed and recorded
After all of the adjustments were made, the accountant presented the adjusted account
balances in the form of financial statements.

After each year's financial statements were completed, closing entries were needed. The
purpose of closing entries is to get the balances in all of the income statement accounts
(revenues, expenses) to be zero before the start of the new accounting year. The net amount
of the income statement account balances would ultimately be transferred to the proprietor's
capital account or to the stockholders' retained earnings account.

Bookkeeping Today
The electronic speed of computers and accounting software gives the appearance that many
of the bookkeeping and accounting tasks have been eliminated or are occurring
simultaneously. For example, the preparation of a sales invoice will automatically update the
relevant general ledger accounts (Sales, Accounts Receivable, Inventory, Cost of Goods
Sold), update the customer's detailed information, and store the information for the financial
statements as well as other reports.

The accounting software has been written so that every transaction must have the debit
amounts equal to the credit amounts. The electronic accuracy also eliminates the errors that
had occurred when amounts were manually written, rewritten and calculated. As a result, the
debits will always equal the credits and the trial balance will always be in balance. No longer
will hours be spent looking for errors that occurred in a manual system.

After the sales invoices, vendor invoices, payroll and other transactions have been processed
for each accounting period, some adjusting entries are still required. The adjusting entries
will involve:
 revenues and assets that were earned, but not yet entered into the software
 expenses and liabilities that were incurred, but not yet entered into the software
 prepayments that are no longer prepaid
 recording depreciation expense, bad debts expense, etc.
The adjusting entries will require a person to determine the amounts and the accounts.
Without adjusting entries the accounting software will be producing incomplete, inaccurate,
and perhaps misleading financial statements.
After the financial statements for the year are released, the software will transfer the balances
from the income statement accounts to the sole proprietor's capital account or to the
stockholders' retained earnings account. This allows for the following year's income
statement accounts to begin with zero balances. (The balance sheet accounts are not closed as
their balances are carried forward to the next accounting year.)

Recording Transactions
Bookkeeping (and accounting) involves the recording of a company's financial transactions.
The transactions will have to be identified, approved, sorted and stored in a manner so they
can be retrieved and presented in the company's financial statements and other reports.

Here are a few examples of some of a company's financial transactions:

 The purchase of supplies with cash.

 The purchase of merchandise on credit.
 The sale of merchandise on credit.
 Rent for the business office.
 Salaries and wages earned by employees.
 Buying equipment for the office.
 Borrowing money from a bank.
the following make up a part of the financial statements of any firm or organization:

 Balance sheet: It shows a statement of financial position, the entity’s assets, liabilities,

and stockholders’ equity as on the report date. However, it does not show information
that covers a span of time as it shows figures of assets and liabilities on a particular date.

 Income statement: It shows a statement of comprehensive income, statement of

revenue and expenses and p/l report. It includes items of revenues, expenses, gains, and
losses. It also provides information on operations carried out by the enterprise.
 Cash flow statement: It helps in showing the changes in the entity’s cash flows
including operating, investing and financing activities during the reporting period.
 Explanatory notes: These include explanations of various activities, additional detail
on some accounts, and other items.

What is the use of a financial statement?

As a whole, financial statements fulfil the following purpose, which makes them indispensable:

 First, to scrutinize the ability of a business to generate cash and the sources and
utilization of that cash.

 Second, to ascertain whether a business has the capability to pay back its debts.
 Third, to help track financial results on a trend line to spot any looming profitability
issues.
 Next, to help derive financial ratios from the statements that can indicate the condition
of the business.
 Lastly, to investigate the particulars of certain business transactions, as mentioned in
the disclosures that accompany along with the statements.

If a business has plans to issue its financial statements to outside users such as investors or
creditors, the financial statements should be ideally formatted in accordance with one of the
major accounting frameworks. These frameworks allow for some leeway in how financial
statements can be structured, so statements issued by different firms even in the same industry
are likely to have somewhat different appearances. Financial statements that are being issued to
outside parties may be audited to verify their accuracy.

What is a Break-Even Analysis?

A break-even analysis is a financial tool which helps you to determine at what stage your
company, or a new service or a product, will be profitable. In other words, it’s a financial
calculation for determining the number of products or services a company should sell to
cover its costs (particularly fixed costs). Break-even is a situation where you are neither
making money nor losing money, but all your costs have been covered.
Break-even analysis is useful in studying the relation between the variable cost, fixed cost
and revenue. Generally, a company with low fixed costs will have a low break-even point of
sale. For an example, a company has a fixed cost of Rs.0 (zero) will automatically have
broken even upon the first sale of its product.

Components of Break Even Analysis

Fixed costs
Fixed costs are also called as the overhead cost. These overhead costs occur after the decision
to start an economic activity is taken and these costs are directly related to the level of
production, but not the quantity of production. Fixed costs include (but are not limited to)
interest, taxes, salaries, rent, depreciation costs, labour costs, energy costs etc. These costs are
fixed no matter how much you sell.
Variable costs
Variable costs are costs that will increase or decrease in direct relation to the production
volume. These cost include cost of raw material, packaging cost, fuel and other costs that are
directly related to the production.

Calculation of Break-Even Analysis

The basic formula for break-even analysis is driven by dividing the total fixed costs of
production by the contribution per unit (price per unit less the variable costs).
Contribution Margin
Break-even analysis also deals with the contribution margin of a product. The excess between
the selling price and total variable costs is known as contribution margin. For an example, if
the price of a product is Rs.100, total variable costs are Rs. 60 per product and fixed cost is
Rs. 25 per product, the contribution margin of the product is Rs. 40 (Rs. 100 – Rs. 60). This
Rs. 40 represents the revenue collected to cover the fixed costs. In the calculation of the
contribution margin, fixed costs are not considered.

When is Break even analysis used?

Starting a new business: If you wish to start a new business, a break-even analysis is a must.
Not only it helps you in deciding, whether the idea of starting a new is viable, but it will force
you to be realistic about the costs, as well as guide you about the pricing strategy.
Creating a new product: In the case of an existing business, you should still do a break-
even analysis before launching a new product—particularly if such a product is going to add
a significant expenditure.
Changing the business model: If you are about to the change your business model, like,
switching from wholesale business to retail business, you should do a break-even analysis.
The costs could change considerably and this will help you to figure out the selling prices
need to change too.
Breakeven analysis is useful for the following reasons:
 It helps to determine remaining/unused capacity of the concern once the breakeven is
reached. This will help to show the maximum profit on a particular product/service
that can be generated.
 It helps to determine the impact on profit on changing to automation from manual (a
fixed cost replaces a variable cost).
 It helps to determine the change in profits if the price of a product is altered.
 It helps to determine the amount of losses that could be sustained if there is a sales
downturn.

Additionally, break-even analysis is very useful for knowing the overall ability of a business
to generate a profit. In the case of a company whose breakeven point is near to the maximum
sales level, this signifies that it is nearly impractical for the business to earn a profit even
under the best of circumstances.
Therefore, it’s the management responsibility to monitor the breakeven point constantly. This
monitoring certainly reduces the breakeven point whenever possible.

Ways to monitor Break even point

 Pricing analysis: Minimize or eliminate the use of coupons or other price reductions
offers, since such promotional strategies increase the breakeven point.
 Technology analysis: Implementing any technology that can enhance the business
efficiency, thus increasing capacity with no extra cost.
 Cost analysis: Reviewing all fixed costs constantly to verify if any can be eliminated
can surely help. Also, review the total variable costs to see if they can be eliminated.
This analysis will increase the margin and reduce the breakeven point.
 Margin analysis: Push sales of the highest-margin (high contribution earning) items
and pay close attention to product margins, thus reducing the breakeven point.
 Outsourcing: If an activity consists of a fixed cost, try to outsource such activity
(whenever possible), which reduces the breakeven point.

Benefits of Break-even analysis

 Catch missing expenses: When you’re thinking about a new business, it’s very much
possible that you may forget about few expenses. Therefore, if you do a break-even analysis
you have to review all your financial commitments to figure out your break-even point. This
analysis certainly restricts the number of surprises down the road.
 Set revenue targets: Once the break-even analysis is complete, you will get to know how
much you need to sell to be profitable. This will help you and your sales team to set more
concrete sales goals.
 Make smarter decisions: Entrepreneurs often take decisions in relation to their business
based on emotion. Emotion is important i.e. how you feel, though it’s not enough. In order to
be a successful entrepreneur, your decisions should be based on facts.
 Fund your business: This analysis is a key component in any business plan. It’s
generally a requirement if you want outsiders to fund your business. In order to fund your
business, you have to prove that your plan is viable. Furthermore, if the analysis looks good,
you will be comfortable enough to take the burden of various ways of financing.
 Better Pricing: Finding the break-even point will help in pricing the products better. This
tool is highly used for providing the best price of a product that can fetch maximum profit
without increasing the existing price.

 Cover fixed costs: Doing a break-even analysis helps in covering all fixed cost.