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 and help answer a number of ‘what-if’ type questions.
Calculating the Non Profit Organization Break Even Point
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.
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.
| 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 |
As expected the net income is zero and the organization shows a break even position.
What-if Analysis and the Non Profit Break Even Formula
The non profit organization break even formula can be used in a variety of ways to answer what-if type questions.
Scenario 1
Suppose the organization finds that its fixed income grant is to be increased from 30,000 to 33,000 in the next financial year. The non profit break even can be recalculated as follows:
Break even sessions = (Fixed costs - Grant income) / (Selling price – Variable cost) Break even sessions = (24,000 - 33,000) / (3.00 - 6.00) = 3,000
Assuming everything else stays the same, as a result of the increase in the grants, the non profit organization can now afford to run 3,000 sessions, and the income statement is as follows:
| Total | |
|---|---|
| Grants | 33,000 |
| Session income (3,000 sessions @ 3.00) | 9,000 |
| Total income | 42,000 |
| Variable expenses (3,000 sessions @ 6.00) | 18,000 |
| Fixed expenses | 24,000 |
| Total expenses | 42,000 |
| Net income | 0 |
Scenario 2
Now suppose that the organization does not want to increase the number of sessions due to say a lack of available space, and prefers to keep them at 2,000.
With the additional grant, the organization can now afford to increase the subsidy to the users. Using the same non profit organization break even formula, we can calculate the new session cost to the user to bring the organization back to a break even as follows:
Break even sessions = (Fixed costs - Grant income) / (Selling price – Variable cost) Break even sessions = 2,000 = (24,000 - 33,000) / (Selling price - 6.00) Selling price = 1.50
The organization can now afford to further subsidize the sessions and charge 1.50 instead of the previous 3.00.The income statement is presented below.
| Total | |
|---|---|
| Grants | 33,000 |
| Session income (2,000 sessions @ 1.50) | 3,000 |
| Total income | 36,000 |
| Variable expenses (2,000 sessions @ 6.00) | 12,000 |
| Fixed expenses | 24,000 |
| Total expenses | 36,000 |
| Net income | 0 |
The break even point formula can be used to quickly calculate various what-if scenarios to produce estimates for the number of sessions the organization can provide for a given level of grant income, selling price, cost price and fixed costs. Once the break even point has been calculated, the results can be used as the basis for adjusting the financial projections for the organization.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.