Author name: Dr Maxwell Ampong

The break-even point (BEP) and break-even analysis are related financial concepts used to assess a business’s financial health. The break-even point is the specific level of sales at which total revenues equal total costs, meaning there is no profit or loss. It is calculated by dividing fixed costs by the difference between the unit selling price and variable cost per unit. On the other hand, break-even analysis is a broader financial assessment that examines the relationship between costs, volume, and profits at various levels of production and sales. It helps businesses determine how changes in costs, prices, and sales volumes impact profitability, providing valuable insights for strategic planning and decision-making. We delve into the core components of break-even analysis, explore its applications, acknowledge its limitations, and highlight its importance in business planning, drawing insights from academic research. A LITTLE HISTORY ALWAYS HELPS Concepts like break-even point (BEP) can be found in the writings of 18th-century economist Antoine Cournot. Cournot’s idea of the “point of indifference” referred to the production level where a firm neither gains nor loses profit. German economist Karl Bücher is often credited as the pioneer of BEP. His work, “Betriebsmittel und Betriebs organisation in Deutschen Handwerk und Manufakturbetrieb des 16. Jahrhunderts” (Operating Resources and Business Organisation in German Handicraft and Manufacturing Businesses of the 16th Century), published in 1893, discussed the importance of understanding cost behaviour and the relationship between costs and revenue. Another German economist, Johann Friedrich Schär, is recognised for his contributions to BEP. His book, “Grundzüge der Kalkulation” (Fundamentals of Costing), published in 1910, elaborated on the concept of the “dead point,” which referred to the production volume where total costs equal total revenue. Since then, BEP has undergone further refinement. Accounting practices have evolved to better categorise fixed and variable costs, and technological advancements have facilitated more sophisticated cost analysis and modelling. KEY COMPONENTS OF FORMULAS Fixed Costs (FC) Fixed costs are expenses that remain constant regardless of the level of production or sales. These expenses do not vary with changes in output. Examples of fixed costs include rent for facilities, salaries of permanent staff, insurance premiums, property taxes, loan payments, and asset depreciation. Even if production is halted or sales decline, fixed costs persist. In break-even analysis, it is essential to identify and quantify fixed costs accurately because they represent the baseline expenses that must be covered before a business can start making a profit. These expenses remain constant regardless of the production volume. Variable Costs (VC) Variable costs are expenses that fluctuate in direct proportion to changes in production or sales volume. Unlike fixed costs, variable costs increase as production levels rise and decrease when production levels decrease. Examples of variable costs include raw materials, direct labour, packaging materials, and utilities such as electricity and water. Variable costs are directly tied to the level of output and are typically expressed on a per-unit basis. Identifying and calculating variable costs accurately is crucial in break-even analysis as they directly impact the profitability of each unit produced or sold. These expenses vary directly with the production volume. Examples include raw materials, direct labour costs associated with production, and utilities used in the manufacturing process. Total Cost (TC) Total costs represent the sum of fixed costs and variable costs incurred by a business. They reflect the overall expenses incurred to produce a given level of output. Total costs provide a comprehensive view of your business’s financial health and represent the minimum revenue required to cover all expenses and achieve break-even. By understanding total costs, businesses can assess their pricing strategies, production levels, and overall cost structure to optimise profitability. Total costs represent the sum of fixed costs and variable costs (TC = FC + VC). Selling Price (SP) The Selling Price (SP) is the amount of money at which a good or service is sold to customers. It represents the revenue generated from each unit of product sold. The selling price is determined by several factors, including production costs, market demand, competition, and desired profit margins. In break-even analysis, the selling price is a crucial variable as it directly influences the revenue generated by a business. By analysing the relationship between the selling price and the cost structure of the business, companies can determine the level of sales required to cover expenses and achieve profitability. Setting an appropriate selling price is essential for maximising revenue while remaining competitive in the market. Contribution Margin (CM) Contribution Margin (CM) is a key financial metric that represents the amount of money earned per unit of product sold, which contributes to covering fixed costs and generating profit. It is calculated by subtracting the variable costs per unit (VC) from the selling price per unit (SP). The contribution margin reflects the portion of revenue available to cover fixed costs and contribute to profit after accounting for variable costs. It represents the excess revenue available to the business beyond variable costs. In break-even analysis, the contribution margin is a critical factor for determining the profitability of each unit sold and assessing the overall financial health of the business. By calculating the contribution margin, companies can evaluate the impact of pricing decisions, cost structure changes, and sales volume fluctuations on their profitability. Maximising the contribution margin allows businesses to cover fixed costs more efficiently and increase profitability. The contribution margin represents the amount of money earned per unit of product sold that contributes to covering fixed costs and generating profit (CM = SP – VC). Break-Even Point (BEP) Formulas Two primary formulas are used to calculate the break-even point. Units: BEP (Units) = Fixed Costs (FC) / Contribution Margin (CM) Revenue: BEP (Revenue) = Fixed Costs (FC) / (Selling Price (SP) – Variable Cost per Unit) Because both denominators speak to the same metric, both formulas give you the same measure of your Break-Even Point (BEP). APPLICATIONS OF BREAK-EVEN ANALYSIS Pricing Strategies Break-even analysis provides businesses with valuable insights into the relationship between pricing decisions and profitability. By analysing the impact of

I wouldn’t call this an opinion piece since it excludes my personal opinions. Also, the story is still unfolding. I am just writing about the events so far and presenting facts to help my audience create their unique perspective. Suppose this Legislative Instrument on cement pricing in Ghana comes to fruition. In that case, it will set an important precedent for many others that could follow within many other sectors in the coming years. That affects you reading this right now, and it also affects me. So, we need to know and comprehend what is currently unravelling. RECENT EVENTS The cement price in Ghana has seen unprecedented fluctuations in recent years, prompting the government to introduce new regulations. As one of the primary materials in construction, the cost of cement significantly impacts the overall expenses for both public and private sector projects. These price changes have posed considerable challenges for construction companies, real estate developers, and consumers, creating a ripple effect across the economy. In response to these issues, the Minister of Trade and Industry, Hon Kobina Tahir Hammond (MP), has presented the Ghana Standards Authority (Pricing of Cement) Regulations 2024 in Parliament. This new Legislative Instrument (LI) seeks to monitor and regulate the price of cement by focusing on price reporting to a Committee.  The nine-member Committee was inaugurated in Accra on 5th April 2024, in line with LI 2480, ahead of introducing this new LI, and is chaired by Professor Alex Dodoo of the Ghana Standards Authority (GSA). It includes representatives from various governmental and industrial bodies, such as the Ministry of Trade and Industry, Ministry of Environment, Science, Technology, and Innovation, Environmental Protection Agency, Ghana Institution of Engineering, Association of Ghana Industries, Chamber of Cement Manufacturers of Ghana, and an expert in cement production nominated by the Minister. Mr Hammond said, “For a long time, we haven’t seen cement prices de-escalating. It is always escalating. I think there is something fundamentally wrong with the pricing of cement in the country.” He indicates that the regulation is not intended to dictate the price of cement; its purpose is to monitor and fairly regulate the price of cement. The move is touted as a proactive step to stabilise the market, promote transparency, and foster sustainable growth in the construction industry. The measure is to become law following a 21-day sitting period in Parliament. However, the Speaker of Parliament, Alban Bagbin, has advised Minister of Trade and Industry, Mr K.T. Hammond, to withdraw the Legislative Instrument (L.I.) on cement price regulation, following constitutional concerns raised by former Minority Leader Haruna Iddrisu. A HISTORICAL PERSPECTIVE OF CEMENT PRICING IN GHANA Ghana’s construction industry has long been a crucial driver of the country’s economic growth, with cement serving as a fundamental building material. However, cement pricing has been a subject of ongoing discussion and concern over the years. We delve into the historical trends and factors influencing cement prices in Ghana, drawing insights from various industry reports and academic sources, as well as facts from recent events. Cement Production and Imports Ghana’s cement industry has a rich history, with the establishment of the country’s first cement factory, Ghacem, in 1967 (Ghacem, 2023). Over the decades, the industry has evolved, with the introduction of additional local producers and the increasing reliance on cement imports to meet the growing demand. According to data from the Ghana Statistical Service, cement production in Ghana has fluctuated over the years, with domestic production accounting for a significant portion of the overall supply (Ghana Statistical Service, 2022). However, the country has also relied on cement imports to bridge the gap between demand and local production capacity, particularly during periods of high construction activity. Factors Influencing Cement Prices Cement pricing in Ghana has been influenced by a combination of factors, including production costs, transportation expenses, market dynamics, exchange rates and government policies. 1. Production Costs: The cost of raw materials, energy, and labour has been a key driver of cement prices in Ghana. Fluctuations in the prices of these inputs can directly impact the cost of cement production, leading to corresponding changes in the prices of the final product. 2. Transportation Costs: The logistics of moving cement from production facilities to distribution centres and construction sites have also significantly influenced cement pricing. Factors such as fuel prices, infrastructure conditions, and transportation distances can significantly influence the overall cost of cement delivery. 3. Market Dynamics: The supply-demand balance in the cement market has been a crucial factor in determining prices. During periods of high construction activity and increased demand, cement prices have tended to rise, while periods of lower demand have often led to more stable or even declining prices. 4. Government Policies: The Ghanaian government has sometimes intervened in the cement market through various policies and regulations. These interventions have aimed to stabilise prices, promote fair competition, and ensure the availability of cement for the construction industry (Ministry of Trade and Industry, 2021). Historical Cement Price Trends Analysing data from the Ghana Statistical Service and industry reports, the historical trends in cement prices in Ghana can be observed: INDUSTRIES IN GHANA IMPACTED BY CEMENT PRICE CHANGES The construction industry is undoubtedly Ghana’s primary consumer of cement, but the impact of cement price fluctuations extends beyond this sector, affecting a range of industries across the Ghanaian economy. Construction Sector Cement is one of the core building materials essential for the construction of residential, commercial, and infrastructure projects. According to a report by the Ghana Statistical Service, the construction sector accounts for over 10% of Ghana’s GDP, significantly contributing to the country’s economic growth (Ghana Statistical Service, 2022). Cement price changes directly impact the overall costs and profitability of construction companies, real estate developers, and infrastructure projects. Manufacturing Industry Ghana’s manufacturing sector also relies heavily on cement to produce various construction-related products, such as concrete blocks, bricks, and pre-cast elements. The Ghana Investment Promotion Centre (GIPC) reports that the manufacturing industry contributes around 11% to Ghana’s GDP, with construction materials being a key subsector (GIPC,

Understanding the burn rate is crucial in the fast-paced world of startups, where every cedi matters. This metric measures how quickly a company spends its cash, serving as a financial fuel gauge for a young business. Burn rate refers to the speed at which a company spends its cash reserves or capital. It is a critical financial metric for startups and businesses to monitor because it indicates how long a company can sustain its operations before securing additional funding. The burn rate is usually expressed in terms of monthly expenditure. The concept of burn rate became particularly relevant with the rise of venture capital (VC) in the US in the 1950s and 1960s. VC firms funded high-risk, high-reward startups, primarily in technology sectors. These startups often operated at a loss in their initial stages, relying on investor funding to cover their expenses while they developed their products and scaled their operations. Burn Rate = Operating Expenses minus Revenue A positive burn rate indicates that a company is spending more cash than it is generating through revenue. This is common for startups in their initial stages, where they are investing heavily in growth initiatives like product development, marketing, and talent acquisition. UNDERSTANDING THE DIFFERENT TYPES OF BURN RATE There are two main ways to look at burn rate. Gross Burn Rate The Gross Burn Rate formula is: Gross Burn Rate = Total Cash Expenditure / Number of Months Gross Burn Rate is a fundamental financial metric that indicates the total amount of cash a company is spending or “burning” each month. It encompasses all operating expenses incurred by the company, irrespective of whether it generates any revenue during that period. The gross burn rate provides a comprehensive view of a company’s expenditure, including salaries, rent, utilities, marketing costs, research and development expenses, and other overheads.  Analysing the gross burn rate is crucial for several reasons. It is a key indicator of a company’s financial health, highlighting whether it is spending its cash reserves rapidly. It can be sustainable if matched by significant revenue or unsustainable if revenue generation is insufficient.  Investors closely scrutinise a company’s gross burn rate when evaluating investment opportunities. While a high burn rate might signal aggressive expansion or investment in growth opportunities, it could also raise concerns about the company’s ability to achieve profitability in the future. Monitoring gross burn rate enables companies to identify areas of excessive spending and implement cost-saving measures, optimising operational efficiency and reducing burn rate without compromising growth prospects.  Net Burn Rate The Net Burn Rate formula is:  Net Burn Rate = Total Monthly Cash Expenditure minus Total Monthly Cash Inflow Net Burn Rate provides a more nuanced understanding of a company’s financial position by considering revenue generation alongside expenditure. It represents the actual cash burn after deducting the total revenue or income generated by the company during a specific period.  The net burn rate reveals a company’s true cash consumption, considering its ability to generate revenue. It indicates the extent to which external funding is required to sustain operations, reflecting the shortfall between expenses and income. Startups and growth-stage companies often aim to achieve a negative net burn rate, where revenue exceeds expenses, indicating self-sustainability. Analysing the net burn rate helps companies chart a path towards financial independence and profitability.  Investors typically prefer companies with a clear plan to reduce their net burn rate over time. A decreasing net burn rate demonstrates financial discipline and progress towards sustainable growth, enhancing investor confidence and valuation. Example If a company spends GHS10,000 per month (total monthly cash expenditure) and generates GHS3000 in revenue (total monthly cash inflow), the gross burn rate is GHs 10,000, and the net burn rate is GHS7000. BURN RATE AS A TOOL FOR DECISION-MAKING Burn rate is a vital tool for both startups and investors: For Startups: Burn rate helps founders understand their financial runway and the estimated time they can operate with their current cash reserves. This allows them to make informed decisions regarding resource allocation, fundraising strategies, and prioritising spending. By monitoring and potentially optimising their burn rate, startups can extend their runway and increase their chances of success. For Investors: Investors use burn rate to assess a startup’s financial health and efficiency. A high burn rate with minimal revenue generation can be a red flag, indicating a potential cash flow problem. However, investors also consider the industry, growth stage, and business model when evaluating the burn rate. FACTORS AFFECTING BURN RATE Several factors can influence a startup’s burn rate. Industry: Industry plays a significant role in determining a company’s burn rate, as different sectors entail varying inherent costs and financial dynamics. For instance, tech startups with high research and development requirements may naturally exhibit a higher burn rate compared to service-based startups. The need for extensive investment in technology infrastructure, talent acquisition, and innovation often results in substantial upfront expenditures for tech companies. Conversely, service-based startups may have lower initial capital requirements, as they typically rely on human capital and existing resources rather than costly technology development. Understanding the industry-specific factors influencing burn rate is crucial for investors and entrepreneurs alike, as it allows for more accurate financial projections and risk assessments.  Growth Stage: In the growth stage of a company, particularly in early-stage startups with limited revenue, the burn rate tends to be higher compared to established startups with a more developed customer base. This is primarily because early-stage startups often prioritise aggressive expansion and investment in product development, marketing, and talent acquisition to capture market share and fuel growth. With limited revenue streams, these companies rely heavily on external funding, leading to a higher burn rate as they ramp up their operations. As startups progress and gain traction in the market, their revenue streams become more diversified and sustainable, allowing them to mitigate their burn rate over time. Established startups with a solid customer base can leverage their market position to generate consistent revenue, reducing their dependency on external funding and achieving a lower burn rate. This transition from a high to a lower burn rate signifies the maturation of a