BREAK-EVEN ANALYSIS FOR BANKING INSTITUTIONS

Аннотация

The break-even point represents the level of business activity at which total revenue equals total costs, resulting in neither profit nor loss—only the fixed costs are fully recovered. Traditionally, break-even analysis has been applied primarily to products, with limited attention given to the services sector, such as banking institutions. This research paper introduces a new formula and methodology specifically tailored to determine the break-even point for banks. It identifies the volume of lending and deposit activities required to cover fixed costs and further allows thecalculation of thevolumeneeded to achieve a targeted profit level. Keywords:Banking Breakeven Point, Banking breaks even lending, Break even deposit amount,Break even deposit interest and break even lending interest Break-Even Analysis is a financial tool used to determine the point at which total revenue equals total costs, meaning the business is not making a profit or loss. This point is known as the Break-Even Point (BEP). In other words, BEP shows how much sales volume (or loan disbursement in banking) is needed to cover all fixed and variable costs. Beyond this point, the organizationstarts making aprofit. Break-even analysis is afinancial toolthat is used bybusinesses todetermine the point at which they will generate enough revenue to cover their fixed and variable costs. This analysis is essential for companies to determine their pricing strategies, understand their cost structure, and plan theiroperationsand investmentseffectively. At its core, break-even analysis involves calculating the break-even point (BEP), which is the point at which a business neither makes a profit nor a loss. To calculate the BEP, a business needs to identify its fixed costs, which are costs that do not vary with the level of production or sales, and its variable costs, which are costs that do vary with the level of production or sales. The total cost is the sum of the fixed and variable costs, while the total revenue is the price of theproduct or servicemultiplied bythequantity sold. Fixed Costs (FC) = Costs that do not change with output level, e.g., rent, salaries, infrastructure. Variable Costs (VC) = Costs that change directly with production or service volume, e.g., interest on deposits. Selling Price (SP) = The price at which goods/services are sold. In banking, it could be the lendingrate. ContributionMargin (CM) = Thedifference between selling price and variable cost perunit. Break-Even Point(BEP)= Thepoint at which Total Revenue = Total Cost(Profit = 0). 583 INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCHERS ISSN:3030-332X Impact factor: 8,293 Volume 11,issue2,May 2025 https://wordlyknowledge.uz/index.php/IJSR worldly knowledge Index: googlescholar, research gate, research bib, zenodo,open aire. https://scholar.google.com/scholar?hl=ru&as_sdt=0%2C5&q=wosjournals.com&btnG https://www.researchgate.net/profile/Worldly-Knowledge https://journalseeker.researchbib.com/view/issn/3030-332X Marginal Contribution – This is the difference between sales revenue and variable costs. It shows how much each unit (or each dollar) of revenue contributes toward covering the fixed costs andeventually generatingprofit. P/V Ratio (Profit/Volume Ratio) – This represents the proportion of marginal contribution to total sales. In other words, it shows what percentage of each dollar of sales remains as marginal profit after covering variable costs. Break-Even PointCalculation forBanking Institution Break-Even Point, refers to the level of output or income at which there is no profit and no loss. In the manufacturing sector, it represents the production volume where total revenue equals total costs. Similarly, in the banking sector, it signifies the income level at which a bank covers all its costs without incurring a profit or a loss. This point is known as the bank’s break-even point. Understanding and calculating the break-even point is highly valuable in risk management, as it aids in both identifying risks and developing strategies to reduce business risk. Since banking falls under the services sector—and does not involve physical product manufacturing—its services primarily includedeposit mobilizationand lending operations. There is typically a margin between the deposit rate (considered as a direct expense) and the lending rate (viewed as the selling price). The difference between these two gives us the contribution margin, which helps in determining profitability. Therefore, in this context, the contributionmust besufficient to cover both fixed costs andthedesired profit. TheBEP can becalculated usingthe following formula: To perform abreakeven analysis in thebanking sector, thefollowing assumptionsare made: FixedCosts:UZS 1,000,000,000(1 billion UZS) Lending Interest Rate:26% Deposit Interest Rate:20% ( ) = − This means that for every 1 soum( mo b)il=ize d a%s a−d e po%sit=an d%lent out, the bank earns 6 tiyin as net interest income. = ( )