Uses of Break-Even Technique in Banking Sector

2.4 Uses of Break-Even Technique in Banking Sector
Bankers will be benefited from using Break-Even analysis for their clients to analyze their credit requests, loan renewals/annual reviews, etc. More specifically C-V-P analysis can aid decision making in the following typical areas.
i. Break-even analysis can be helpful to bankers in evaluating prices, variable & fixed expenses, product mix, volume and other variables affecting earnings. This analysis will be useful to examine certain supplementary points which will be worthwhile to do before taking credit decisions by a bank.
ii. Bankers can predict the payback period of their invested amount. Due to this, if an industry breaks even earlier, the banker will get his money earlier both in respect of term lending as well as working capital financing.
iii. On the basis of the level of output and sales, bakers can predict and estimate the borrowing capacity of the proposed project.
iv. Break-even analysis helps the bankers to fix up a well timed repayment schedule. In case of earlier break-even higher installment can be stipulated. Whether banker will provide some repayment facilities to the borrower depending on the level of activity of the borrowers unit i.e. whether the unit is operating below or above the BEP.
v. BEP analysis serves the information about the projected cost of production and profitability of the respective unit. So, banker can manage the ultimate default rate of the borrowers if lending is provided on the basis of the BEP analysis of projects.
vi. This analysis is a handy tool to measure the future cost and revenue relationship with the level of activity. As a widely used technique for feasibility studies it also measures the past performance of a business enterprise. BEP also helps to determine the minimum level of production and future working capital requirements of the respective enterprise.
Break-Even Formulae
The Break-Even analysis is actually based on a simple mathematical model involving some fundamental concepts of economics, managerial accounting and cost accounting. The arithmetic, of Break-even may be explained with the help of a few formulae.
Accountant’s View Point
In Quantity Term
At Break-Even Point: Sales = Total Cost P = Sales Price per unit Here,
Sales= P.Q. Q = Quantity of Product Total Cost = V.Q. + f P.Q. = V. Q. + F = Total Fixed cost P. Q = V. Q = F or. q(P-V) = F V = Variable cost per unit. Q = FP-V
BEP (in units) FP-V Theoretically, the Break-Even level of output is simply the fixed cost divided by the difference of unit price and unit variable cost (P-V). i.e. Unit contribution Margin. BEP in Sales term (in Tk) At Break-Even Point S = V + F S = Total Sales S – V = F V = Total Variable costs Contribution Margin = Fixed cost
F = Total Fixed Costs S –( VS )S=F S (1- VS ) =F S = F1-V/S [1-v/S is called as contribution margin ration] Economists View Point Let C = 700+10q + 9q2 P = Demand Function P = 730 – 11q R = P.q q = Output = (430-11q)q R = Revenue = 730q – 11q C = Cost Function.
Method- 1 To obtain Lower & Upper Break-Even Points. At BEP: Total Cost = Total Revenue. 700 + 10q + 9q2 = 11q2 20q2 – 720q + 700 =0 20 (q2 – 36q + 35) =0 q2-36q + 35 =0 This gives us (q-1) (q-35) =0 q = 1
q = 35 (It implesi) Firm gets break-even position almost right at the beginning i.e. when q=1 ii) The upper break-even point sets the maximum level for expansion of output for positive profit i. e. when q = 35. Method -2
To obtain Maximum Level of Profit. Profit are maximized when. MC=MR Where, MC = Marginal Cost MR MC = d(TC)dq = ddq (700 + 10q + 9q2) =Revenue MR= d(TR)dq = ddq (730q-11q2) = 730-22q.
So 10+18q = 730-22q 40q=720 q = 18 Level of output which gives maximum level of total profit is 18 units. 2.5 Management Training Policy in Banks: A Study
The formulation of a well-conceived management training policy is one of the important steps in planning for management training. The training policy is a significant factor in resolving many of the problems which beset management training schemes. However, colloquially, policy answers such question as: Where are we going? How are we going to get there? It is rather the nation that people will work together more effectively if they are authorized and trained to consider day-to-day problems in the light of policy at their respective levels of responsibility. A modern organization has a sound policy conducive to management training3. Such a policy represents the top management’s commitment to training of managerial personnel and comprises of rules and procedures governing the standard and scope of management training.
A management training policy should be more than the expression of pious hopes. It should provide a framework of reference writhing which managers, at all levels in a bank, can understand, develop and apply the banks management training policy is developed will itself reflect the culture of the banking organization for which it is intended.
A management training policy is considered necessary for these reasons: i) To provide guidelines for those responsible for planning and implementing management training; ii) To ensure that a company’s management training resources are allocated to priority requirements: iii) To provide for equality of opportunity for management training throughout the company; and iv) To inform managerial personnel of training and development opportunities. While only top management can set management training policy, the training director should play a pivotal role in its original formulation. He should take the initiative and help set the policy he feels is essential to helping the organization in its work. A well-conceived and rational management training policy and the training activities of a particular organization are favorably or adversely affected by thinking and outlook of the top management.

The training Directors are responsible for deciding management training policies, although the effectiveness of their decisions will be increased if they have consulted their subordinates. The requirements of line management should be fully considered and the training officer plays an important part in this process. The participation of employee representative on Training Boards and on company training committees, and the growing awareness of the benefits of involving employees in decision-making, have led some organizations to develop policies in collaboration with trade union or other employee representatives. The board of directors’ decisions is more effective if they are constant with the values and expectations of the organization they direct.

The training Director of the Bangladesh institute of Bank Management (which was set up in 1974) and 3 Directors/Principal of individual training institutes of Nationalized Commercial Banks (which were established in between 1976 and 1977) with the help of concerned Faculty Members are generally engaged in preparing academic programmers for the year. Bangladesh Institute of Bank Management which is known as the only national training.


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