Critical Path Analysis has ties with corporate strategy and human resources. It enables a business to gain a competitive advantage by effectively planning their time to pursue a goal. This can be especially important when they are trying to be first to market or when the process requires a lot of routine steps. It is also relevant in the computing sector and neural networks.
Detailing the steps involved can help to create a better picture of the complexity of a project. To do this, Critical Path Analysis Diagrams are used to break down the project into stages.
Each stage is made up of nodes, and each node is made of three numbers, the nodes are the circles in the image above (there are two) and have a path between them, Each path has the project that will be completed on the top and the time on the bottom.
Each node has a number on the left half, the earliest start time on the top and the latest finishing time on the bottom. Some diagrams also denote the direction of the path, however, it usually starts on the left, and ends on the right.
Some Critical Path Analysis Diagrams can become complex and take a long time to complete, some stages may also require few or many steps to complete, it is for this reason that Critical Paths are also shown on a diagram.
In the diagram above, there are four nodes and therefore more work to be completed, however having a top and bottom section has so far proven redundant. It is only when there is an alternate path that these nodes become useful.
We can now see that having the latest finish time has meant that the project now cannot be finished until the ninth day as the task ‘Air Transport’ Requires a longer time period than the other tasks. This is why the fourth node now reads ‘9’ on the latest finish time. Additionally, there is now dashes along the Critical Path as this task must be completed in order for the project to remain on time.
Critical Path Advantages
Finding the critical path of a project allows a business too;
Conduct better contingency planning as they can see clearly where projects have the potential to get held up in the process and aren’t slowed down due to failures in the system.
Optimize workflow for employees as they will be able to better manage the time they need to complete a task, should a task have a long lead time, the task could be delayed without affecting the progress of the project, for example, a node having a quicker ‘earliest start time’ than other tasks.
Allows a job to be completed in the shortest amount of time possible.
It can help to reduce risk on projects that have complex time dependencies.
Critical Path Disadvantages
However, it does not account for the likelihood of failure of a task where it was poorly planned from the beginning.
It does not account for the fact that a project may eventually have stages that need changing as time progresses or situations change.
It depends on the accuracy of the projects predicted time-scale.
It may not account for other factors like cost or trade-off.
Resources may not be as flexible in the long term as previously planned.
When conducting market research businesses need to take risks and may be uncertain on the performance of those risks, however market research allows businesses to minimize the risk.
Market research in a dynamic market can be difficult as it can be hard to gauge what is an acceptable metric and one that will not change or become inaccurate. Businesses invest thousands in trying to calculate what the next big trend will be and even more in advertising.
Selling Products is the ultimate goal for market research, however it may allow a business to better define its product for market
Dynamic markets can provide access points for rapidly growing start-ups
Markets can be dominated by Oligopolies, Monopolies or have low demand, which can mean that a business will struggle to set-up there
Market research could be very expensive for a business and it has many pitfalls and benefits
There are a number of techniques that businesses can use to identify if they should set-up a business.
Competitor Analysis, anything that allows a business to know what the otherbusiness competing are up to is competitior analysis.
Crime Levels, Crime can ruin a business so it is important that a business is in a safe loaction, a jewlers in a poor area won’t do very well.
Average Wage, wages could contribute to the staffing levels available for the businesses.
Footfall, people who walk past the business.
Client Need, Some business may setup new premisises as a client has created a demand.
Overhead, a rented building with too high overhead may not be viable as a solution.
Start-up Cost, some businesses cannot create a start-up without initial funding, especially if their project has great risk.
Population/Target Market, local area business may not be able to set-up a business because the demand is so low.
Public Opinion, some people may not like the idea of a business setting up in a particular area.
Local Economy, the local area may not be affluent enough.
Building Space, some business premises may not be large enough.
Some Market Research Techniques
Businesses can use multiple techniques to find out these aspects, such as:
Market research does have limitations,
You cannot constantly keep asking the same customers
You cannot ask some questions
Data could be inaccurate
It is expensive
It is not always your own data
It product idea could be stolen
The market could be fast changing
There could be leading questions or biased interviews when asking individuals
Here is a Break-even chart. It represents a 24 day period.
Break-even is when a business is not making any losses or profit, seen in the chart above at 11 days. It can be seen that the yellow total costs line, is the same angle as the variable costs line, plus fixed costs. It also can be determined, that the blue shaded are represents the magin of safety as after that all costs are paid.
What is Margin of Safety?
The margin of safety is how much additional units you have sold in a given period. For example, in the graph below, we are on our 18th day.
On this day we have spent approximately $680 since day 1, and by day 18, we have made $1040 revenue, so our margin of safety is $1040-$680= $360, however margin of safety does not work in moneyso we need to convert it back to units, so if each unit sells for $10, then our margin of safety is36 units.
What is Break-even useful for? (Advantages and Disadvantages)
The point at which you aren’t making any losses or profit.
It allows you to identify problems you may face with cash flow on new investments, for example;
Investing in a more expensive warehouse may not be financially viable, as the investment would create a small margin of safety.
Increasing variable cost may make break-even harder to achieve.
It allows a business to ‘relax’ it’s workload after it has reached it’s margin of safety, as it no longer needs to cover costs. Everything made past the break-even point is profit.
It may allow an entrepreneur identify where they may want to take risks.
It also allows an entrepreneur to identify when a theorised project is not financially viable.
It focuses on what output is required before a business reaches profitability
Helps management and Finance providers better understand the viability of a risk or business idea.
It does not cater for potential changes in the moment
Unrealistic assumptions that everything stays the same.
It is more of a planning aid, than a decision tool.
However there are limitations of the chart, as it does not allow you to anticipate economy of scale, changes in fixed cost or demand. The most important factor that it allows you to calculate is the point that you aren’t making any losses or profit.
How is Break-even calculated?
Break-even Output = Fixed Costs / Contribution per unit
Contribution per unit = Selling price per unit - Variable cost per unit
Contribution per unit = Contribution per unit x Number of units sold