What Precisely Is Break-Even Evaluation?
Align learning with cost-volume-gain
There is blatant ignorance in on-the-job learning for the proper application of business and finance concepts. Practitioners keep talking about aligning their learning efforts with business results, but when held accountable they are the first to say, “It’s not my job.” When it comes to accountability, it’s either “I wasn’t hired to do this” or they manipulate certain business concepts according to their own interpretations. Either way, their uncertainties are visible and it is worrying.
I strive to alleviate these insecurities. Over the coming months, I’ll be devoting a series of articles to curate and explain how to apply business concepts that your stakeholders use to build credibility for your learning endeavors. The hope is that this will become a quick reference source for any learner.
In this article, I’ll explain how you can align your learning efforts with a commonly applied cost-benefit approach that stakeholders refer to as cost-volume-profit analysis, or what the layman will recognize as break-even analysis.
What is a break-even analysis?
When practitioners hear break-even, they instinctively believe that stakeholders want to see how their learning efforts pay off, and worse, they start making money. This is far from being a topic for a future article.
A break-even analysis is essentially about when the total cost of an expense represents value for the company. Yes, the ultimate goal is to find out when it will be profitable. However, the profitability measure relates to the revenue generating activity itself and the cost of supporting it. It is essentially about the impact of the proposed cost on the profitability of the activity. So when you suggest additional costs, the first thing that comes to mind to your stakeholders is, “How will this affect breakeven and when will it start making money?” (the relationship between cost, volume and profit).
This is where things get interesting and often confusing for practitioners who are studying. They interpret their stakeholders’ “show me value for learning” as “proving that the cost of learning is covered and making money”. Stakeholders wonder whether the learning effort is helping to increase the profitability of the actual revenue-generating activity. Another related myth practitioner believes that the stakeholders hold them solely responsible for the success of the revenue-generating activity. Again, this is not the case and shows how practitioners severely misinterpret and misunderstand stakeholder expectations.
In a previous article for the eLearning industry entitled “Evaluating eLearning Investments through a Cost-Benefit Analysis” I explicitly applied a simple example of how the cost-volume-income approach applies to an eLearning investment relates. I recommend a quick read. In the example, the stakeholder says that they will lose money by investing in the proposed eLearning initiative. Instead of losing negative money, you will see a decrease in operating income. However, the practitioner will interpret this to mean that their effort costs too much instead of re-examining the business case with their operational partner to make it work – and that is a big problem.
What should i do?
In the article example, the additional eLearning costs lead to an operating loss if the practitioner promised that this would help the operating staff to increase sales and thus profitability. Even if the learning initiative allowed the establishments to maintain the existing operating profit, the stakeholders would continue, even if it were not a strong case. The learner practitioner and operational stakeholders should work together to determine how the eLearning efforts can be used to demonstrate viability.
There are ways to do this. First and most obvious is the reduction in cost. As you can see, learning costs for the operational partner are additional fixed costs. Because of the increased fixed eLearning costs, they will either need to increase sales to offset the increase in costs or reduce costs in other areas, and chances are they have already looked at the latter.
Business people are taught to deal with what they control. In that case, costs would be reduced because increasing revenue is a precarious and unpredictable task. The practitioner should proactively review their eLearning costs and, without compromising their intent, seek to reduce or reallocate the cost of the initiative. This assumes that you know how much to cut as this is the break-even point for the operational activity.
The second thing practitioners can do is identify long-term qualitative benefits. This is a little elusive and requires substantial evidence to convince the stakeholders. The interest groups expect a relative tangibility or at least a causal relationship. The stakeholders recognize that some support activities (learning, marketing, etc.) produce intangible results. However, they also expect evidence that the efforts are delivering their expected value for the money assigned to them. In our example, there is a loss of operating income in the first year, but what can stakeholders expect over the long term?
Here you need evidence to prove the indirect value contribution. For example, suppose the eLearning effort is about improving the skills of the sales team. You should correlate and measure the impact of the eLearning course against something relevant like reducing time in the office, increasing your potential pipeline, or closing more deals. This example can be done with any operational activity and will help support Kirkpatrick Levels 3 and 4. Remember that your learning objectives are never about “learning” but about improving performance [1].
So what now?
Of course, we only scratched the surface to demonstrate and prove how learning can add business value. This article is not intended to make you a business expert. The aim is to sensitize you to operational and financial concepts and to better understand them, which your business prospects use on a regular basis. If you want to learn more about cost-volume-gain, also known as break-even analysis, search for this topic on LinkedIn Learning [2] or you can also search for “controlling”.
Please look out for my next article on business and operational concepts relevant to stakeholder decision making and learning.
If you’re interested in finding out how to estimate the cost of your learning effort, please check out my latest LinkedIn learning course, “Accounting Foundations: Cost Estimating” [3]. It has just been released and gives you the opportunity to properly estimate the cost of your next learning project.
Please share your thoughts and feedback with us. We look forward to hearing from your efforts. And who knows, maybe it will be the topic of our next article in the eLearning industry. Also, take a look at our LinkedIn learning courses to learn more about developing your business credibility for your learning endeavors. Please share your thoughts and remember to always study!
References:
[1] Learning objectives should NEVER be learning
[2] Search: Cost-Volume-Profit Analysis
[3] Accounting basics: cost estimate
