What Exactly Is Break-Even Analysis?


Aligning Learning With Cost-Volume-Profit

There’s a glaring ignorance within workplace learning for the proper application of business and financial concepts. Practitioners continually talk about getting their learning efforts to align with business outcomes, but when held to account, they’re the first to claim, “It’s not my job.” When comes to accountability, it’s either the “I wasn’t hired to do that” or they manipulate specific business concepts to their own interpretation. Either way, their insecurities are on display and it’s worrisome.

I’m aspiring to help alleviate these insecurities. In the coming months, I’ll be dedicating a series of articles to curate and explain how to apply business concepts your stakeholders use to build credibility for your learning efforts. The hope is that this will become a quick reference resource for every learning practitioner.

In this article, I’ll address how to align your learning efforts with a commonly applied cost-benefit approach stakeholders refer to as cost-volume-profit analysis, or what the layperson recognizes as a break-even analysis.

What Is A Break-Even Analysis?

When practitioners hear break-even they instinctively believe stakeholders want to see how their learning effort will cover its cost and worse, begin making money. This is far from the case and a topic for a future article.

A break-even analysis is fundamentally about when the total cost for any effort will demonstrate value for the organization. Yes, the ultimate goal is to find out when it’ll be profitable. But the profitability measure refers to the revenue-generating activity itself and the costs to support it. It’s essentially about the impact the suggested cost has on its profitability of the activity. So, when suggesting an additional cost, the first thing that will cross your stakeholder’s mind is “How will this affect the break-even and when will it start making money?” (the relationship among cost, volume, and profit).

This is where things get interesting, and often confusing, for learning practitioners. They’ll interpret their stakeholders’ “show me value for learning” as “prove that the cost for the learning is covered and it makes money.” What stakeholders are asking is whether the learning effort is contributing value to growing profitability for the actual revenue-generating activity. Another related myth practitioners believe is that stakeholders hold them solely accountable for the revenue-generating activity’s performance success. Again, this is not the case, and it shows how practitioners highly misinterpret and misunderstand stakeholder expectations.

In a previous article for eLearning Industry titled, “Evaluating eLearning Investments Through A Cost-Benefit Analysis,” I explicitly applied a simple example about how the cost-volume-profit approach relates to an eLearning investment. I highly recommend a quick read. In the example, the stakeholder says that they are losing money by investing in the proposed eLearning initiative. They’re not negatively losing money but rather seeing a reduction in operating income. The practitioner, however, will interpret this as their effort costing too much rather than revisiting the business case with their operational partner to make it work—and that’s a big problem.

What Should You Do?

In the article example, the additional eLearning cost results in an operating loss when the practitioner promised it would help operating staff increase revenue and hence, profitability. Even if the learning initiative allowed operations to maintain existing operating income, stakeholders would proceed, albeit it wouldn’t be a strong case. The learning practitioner and operational stakeholders should work together to discover how to get the eLearning effort to demonstrate viability.

There are ways to do this. First, and most obvious, is reducing cost. You see, learning expenses for the operational partner are an additional fixed cost. As a result, the increased fixed eLearning cost requires them to either increase revenue to offset the cost increase or reduce costs in other areas, and chances are, they’ve already addressed the latter.

Business professionals are taught to address what’s in their control and in this case, it would be reducing costs since increasing revenues is a precarious and unpredictable task. The practitioner should proactively revisit their eLearning costs and, without sacrificing its intent, look to reducing or reallocating the costs for the initiative. This requires knowing how much to reduce since this is the operational activity break-even point.

The second thing practitioners can do is to show long-term qualitative benefits. This is somewhat more elusive and requires substantive evidence to convince stakeholders. Stakeholders expect relative tangibility or at least some type of causal relationship. Stakeholders recognize that some supporting activities (learning, marketing, etc.) deliver intangible results. But, they also expect to see evidence that the effort is delivering its expected value for the money allocated to it. In our example, there’s a first-year operating income loss but what can stakeholders expect over the long term?

This is where you require evidence to demonstrate indirect value contribution. Let’s say the eLearning effort is about improving the skills of the sales team. You should correlate and measure the impact of the eLearning course to something relevant like reducing time in the office, increasing the prospect pipeline, or closing more deals. This example can be done with any operational activity and helps to support Kirkpatrick levels 3 and 4. Remember, your learning objectives are never about “learning” but rather about improving performance [1].

So, Now What?

Naturally, we’ve only scratched the surface to demonstrate and prove how learning can contribute to increasing operational value. This article isn’t meant to make you a business expert. Its intent is to make you more aware and more literate with operational and financial concepts your business stakeholders regularly apply. If you’d like to learn more about cost-volume-profit, aka break-even analysis, then search LinkedIn Learning for this topic [2] or you can also search for “managerial accounting.”

Please watch for my next article on business and operational concepts relevant to stakeholder decision-making and adding learning value.

Should you want to discover how to estimate the costs for your learning efforts, then please check out my latest LinkedIn Learning course, Accounting Foundations: Cost Estimating [3]. It was just released and will offer you the skill to properly estimate the required costs for your next learning project.

Please share your thoughts and feedback with us. We’d enjoy hearing about your efforts. And who knows, it may be the topic of our next eLearning Industry article. Also, please check out our LinkedIn Learning courses to learn more about developing your business credibility for your learning efforts. Please share your thoughts and remember #alwaysbelearning!

References:

[1] Learning Objectives Should NEVER Be About Learning

[2] Search: cost volume profit analysis

[3] Accounting Foundations: Cost Estimating


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