Startups Stack Exchange Archive

When you are doing breakeven analysis do you include VAT

In the UKdoes the break even include VAT or Not is it the total price of the item?

Answer 8281

Accounting has nothing to do with break even analysis (BEA). Therefore VAT has NO influence on BEA.

Lets say you your own price for your product is 1000€/a, the tax rate is 20%, so you collect 1200€/a. You also invested 4000€ to start your venture and you will have costs of 600€/a.

VAT is collected by your startup and transferred to treasury (I hope that is the right term and usage) within a certain time frame. So your earnings per year are increased by 200€ and reduced by 200€ again.

The BEA shows a time span, in which you have more money earned then spend for your venture. So only the earnings influence BEA.

Also there is a difference. VAT collection and calculation is a task/number which represents the past, while Break Even Analysis is a tool to predict the future. You try to keep prediction tools simple. Mostly they don’t display reality, but they make different approaches comparable!

Let’s do our simple example without VAT: (BEP = Break Even Point)

0 = -4000 + (1000 - 600) * BEP

BEP = 10

Now with VAT:

0 = -4000 + (1200 - 600) * BEP - (1000 * 0,2) * BEP

BEP = 10

(Please be careful, this could be extended to any complexity and is not true for every case, example: interest business like banking or investment groups. But i hope you get the point)

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