Accounting Tutorial : Break Even Analysis and Cash Flow

Accounting Tutorial: Break Even Analysis and Cash Flow Chapter 4

Break-Even Service Projections
Break-Even Formal Wear Income Projections
Break-Even Analysis Template An important step in preparing the business plan is the break-even analysis. Managers, on a regular basis study the effect of internal decisions and outside conditions that afffect revenue and expenses. Revenue is affected by competitors, pricing policies and changes in the market demand for products and services. Expenses are affected by prices paid for products, the volume of sales and other factors. An important aspect of planning to meet profit goals is to analyze the effect of increased sales on net income. This is often referred to as "break-even analysis". The break-even point is the point at which a business moves from a loss to a profit position. Many business owners make the mistake if bringing a product or service to the market without understanding all the costs involved and the prices they charge. As a consequence, the enterepreneur may discover that they can not sell enough of the product or service to make a profit. A break-even analysis enables you to determine if your idea is profitable. The break-even analysis will show you how much of your product or service must be sold to generate a specific level of profitability. Each VE company has certain fixed costs. Fixed costs are the ones that must be paid each month whether sales take place or not. In our tuxedo rental business they are: Salary 83,328.00 Rent 3,500.00 Repairs 50.00 Alterations 1,500.00 Advertising 2,000.00 Dry Cleaning 8,514.00 Insurance 750.00 Payroll Tx 8,957.70 Depreciation 3,268.12 Utilities 1,875.00 Interest 1,508.00 Supplies 150.00 Misc. 100.00 The total of the fixed expenses is $105,486.82 The variable costs for Bromley's Tuxedo Rental Business are the ones associated with the amount of rentals. The rented tuxedos must all be dry cleaned after each use and many of them need alterations so that they fit right. The variable expenses are listed below Alterations expense 1,500.00 Dry cleaning expense 8,514.00 Total 10,014.00 Our average rental cost for each tudedo is $125. Each tudedo costs $7.50 to dry clean. Shirts are $1.50 If we add the two together we come up with $9.00 per rental. We have projected 946 rentals. To arricve at this amount, we took our sales figure and divided it by the average cost of a tuxedo rental (118,328/125) = 946 We then multiplied our individual cleaning cost of $9.00 times 946 to arrive at $8,514 for dry cleaning expense. To get the break-even point, we need to add the fixed costs to the variable costs. Break-Even = Fixed Costs + Variable Costs Break-Even = 105,486.82 + 10,014 Break Even = 115,500.82 The break even analysis is usually done in a graphical representation with the horizontal axis representing number of tuxedos rented. The vertical axis represents dollars of revenue or expenses. First the revenue line is plotted, running from zero volume of sales to $118,328 representing the rental of 946 tuxedos at $125 a piece per month. Remember, however, the sales contract with the VEC means that they will be buying 666 tuxedos from you. To calculate this amount, take your salary expense and divide it by your total sales (83,328/118,328) = .7042 Multiply (.7042 times 946 and you will get 666 tuxedos bought by the VEC. You will need to rent the difference (946-666 = 280) tuxedos at $125.00 each month at trade fairs, grand openings and open houses to meet your sales projections. To break even, you will need to rent 924 tuxedos (115,500.82/125). VEC rents 666, so you would need to rent 258 to break even. Click on the line called "Break-Even Service Projections" to see a graphical representation of this. Bromley's Formal Wear Break-Even Analysis Calculating the break-even point for a merchandising business is a little more complicated than for a service business. We are still dealing with fixed and variable costs. The fixed costs remain the same. Those costs are the ones that continue whether we sell anything or not. Examples include rent, utilities, insurance, etc. The variable costs involve the merchandise that we buy to resell to our customers. In the case of the formal wear business, these are mens' suits, dress shirts, ties, bridesmaids' dresses, bridal gowns, etc. The formal wear business has a sales contract of $132,241.53. The projected grand opening sales are $125,000. The total of these is $257,241.53. To calculate our break-even point we can use the following formula: Sales (S) = Variable Expense (V) + Fixed Expense (F) + Net Income (I) S = V + F + I S = .587S + 102,709 + 0$ .413S = 102,709.82 (1.00 - .587= .413) S = 102,709.82/.413 S = 248,692.05 We will need $248,692.05 worth of sales just to break even. If an average sales is $500, we would need 497 sales per month. If you would rather use a break-even calculator template, rather than calculating the number with the formula above, click on the line for "Break-Even Calculator". If using the calculator remember to enter the fixed expenses in the fixed expense column. Variable expenses are entered as a percentage of sales. In our case the percentage is 58%. for inventory or materials and 1% for alterations There is a slight discrepancy between the calculator and the formula. The difference is approximately $1,300. To see a graphical representation of the break-even analysis for Bromley's formal Wear, click on the link on this page.

Bromley's Tuxedo Rentals Income Statement For the period ending November 30 REVENUE Sales 118,328.00 Other Income Total Revenue 118,328.00 EXPENSES Salary Expense 83,328.00 Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Dry Cleaning Expense 8,514.00 Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 3,268.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense 8,957.70 Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1508.00 Delivery Expense Total Expenses 115,500.82 Net Profit 2,827.18 Bromley's Formal Wear Income Statement For the period ending November 30 REVENUE Sales Contract 132,241.53 Grand Opening 125,000.00 Total Revenue 257,241.53 COST OF MERCHANDISE SOLD Beginning Inventory 100,000.00 Purchases 148,065.77 Mdse Avail for Sale 248,065.71 Less End Invenory 97,064.94 Cost Of Goods Sold 151,000.77 Gross Profit 106,240.76 EXPENSES Salary Expense 83,328.00 Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 491.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense 8,957.70 Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1,508.00 Delivery Expense Total Expenses 104,209.82 Net Profit 2,030.94

1. Planning to meet profit goals and analyze the effect of increased sales on net income is called?
Cash Flow Analysis Break-Even Analysis Profit to Risk Ratio
2. The point at which a business moves from a loss to a profit position is called?.
Net Income Gross Sales Break-Even

3. Cost that must be paid each month whether sales take place or not?
Fixed Costs Variable Costs Revolviong Costs
4. If our fixed costs are $95,000 and the variable cost percentage is 45%, what is our break-even point?
$150,435.62 $172,727.27 $183,953.65

Break-Even Service Projections Break-Even Formal Wear Income Projections Break-Even Analysis Template	An important step in preparing the business plan is the break-even analysis. Managers, on a regular basis study the effect of internal decisions and outside conditions that afffect revenue and expenses. Revenue is affected by competitors, pricing policies and changes in the market demand for products and services. Expenses are affected by prices paid for products, the volume of sales and other factors. An important aspect of planning to meet profit goals is to analyze the effect of increased sales on net income. This is often referred to as "break-even analysis". The break-even point is the point at which a business moves from a loss to a profit position. Many business owners make the mistake if bringing a product or service to the market without understanding all the costs involved and the prices they charge. As a consequence, the enterepreneur may discover that they can not sell enough of the product or service to make a profit. A break-even analysis enables you to determine if your idea is profitable. The break-even analysis will show you how much of your product or service must be sold to generate a specific level of profitability. Each VE company has certain fixed costs. Fixed costs are the ones that must be paid each month whether sales take place or not. In our tuxedo rental business they are: Salary 83,328.00 Rent 3,500.00 Repairs 50.00 Alterations 1,500.00 Advertising 2,000.00 Dry Cleaning 8,514.00 Insurance 750.00 Payroll Tx 8,957.70 Depreciation 3,268.12 Utilities 1,875.00 Interest 1,508.00 Supplies 150.00 Misc. 100.00 The total of the fixed expenses is $105,486.82 The variable costs for Bromley's Tuxedo Rental Business are the ones associated with the amount of rentals. The rented tuxedos must all be dry cleaned after each use and many of them need alterations so that they fit right. The variable expenses are listed below Alterations expense 1,500.00 Dry cleaning expense 8,514.00 Total 10,014.00 Our average rental cost for each tudedo is $125. Each tudedo costs $7.50 to dry clean. Shirts are $1.50 If we add the two together we come up with $9.00 per rental. We have projected 946 rentals. To arricve at this amount, we took our sales figure and divided it by the average cost of a tuxedo rental (118,328/125) = 946 We then multiplied our individual cleaning cost of $9.00 times 946 to arrive at $8,514 for dry cleaning expense. To get the break-even point, we need to add the fixed costs to the variable costs. Break-Even = Fixed Costs + Variable Costs Break-Even = 105,486.82 + 10,014 Break Even = 115,500.82 The break even analysis is usually done in a graphical representation with the horizontal axis representing number of tuxedos rented. The vertical axis represents dollars of revenue or expenses. First the revenue line is plotted, running from zero volume of sales to $118,328 representing the rental of 946 tuxedos at $125 a piece per month. Remember, however, the sales contract with the VEC means that they will be buying 666 tuxedos from you. To calculate this amount, take your salary expense and divide it by your total sales (83,328/118,328) = .7042 Multiply (.7042 times 946 and you will get 666 tuxedos bought by the VEC. You will need to rent the difference (946-666 = 280) tuxedos at $125.00 each month at trade fairs, grand openings and open houses to meet your sales projections. To break even, you will need to rent 924 tuxedos (115,500.82/125). VEC rents 666, so you would need to rent 258 to break even. Click on the line called "Break-Even Service Projections" to see a graphical representation of this. Bromley's Formal Wear Break-Even Analysis Calculating the break-even point for a merchandising business is a little more complicated than for a service business. We are still dealing with fixed and variable costs. The fixed costs remain the same. Those costs are the ones that continue whether we sell anything or not. Examples include rent, utilities, insurance, etc. The variable costs involve the merchandise that we buy to resell to our customers. In the case of the formal wear business, these are mens' suits, dress shirts, ties, bridesmaids' dresses, bridal gowns, etc. The formal wear business has a sales contract of $132,241.53. The projected grand opening sales are $125,000. The total of these is $257,241.53. To calculate our break-even point we can use the following formula: Sales (S) = Variable Expense (V) + Fixed Expense (F) + Net Income (I) S = V + F + I S = .587S + 102,709 + 0$ .413S = 102,709.82 (1.00 - .587= .413) S = 102,709.82/.413 S = 248,692.05 We will need $248,692.05 worth of sales just to break even. If an average sales is $500, we would need 497 sales per month. If you would rather use a break-even calculator template, rather than calculating the number with the formula above, click on the line for "Break-Even Calculator". If using the calculator remember to enter the fixed expenses in the fixed expense column. Variable expenses are entered as a percentage of sales. In our case the percentage is 58%. for inventory or materials and 1% for alterations There is a slight discrepancy between the calculator and the formula. The difference is approximately $1,300. To see a graphical representation of the break-even analysis for Bromley's formal Wear, click on the link on this page.
Bromley's Tuxedo Rentals Income Statement For the period ending November 30 REVENUE Sales 118,328.00 Other Income Total Revenue 118,328.00 EXPENSES Salary Expense 83,328.00 Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Dry Cleaning Expense 8,514.00 Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 3,268.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense 8,957.70 Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1508.00 Delivery Expense Total Expenses 115,500.82 Net Profit 2,827.18	Bromley's Formal Wear Income Statement For the period ending November 30 REVENUE Sales Contract 132,241.53 Grand Opening 125,000.00 Total Revenue 257,241.53 COST OF MERCHANDISE SOLD Beginning Inventory 100,000.00 Purchases 148,065.77 Mdse Avail for Sale 248,065.71 Less End Invenory 97,064.94 Cost Of Goods Sold 151,000.77 Gross Profit 106,240.76 EXPENSES Salary Expense 83,328.00 Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 491.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense 8,957.70 Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1,508.00 Delivery Expense Total Expenses 104,209.82 Net Profit 2,030.94
1. Planning to meet profit goals and analyze the effect of increased sales on net income is called? Cash Flow Analysis Break-Even Analysis Profit to Risk Ratio	2. The point at which a business moves from a loss to a profit position is called?. Net Income Gross Sales Break-Even
3. Cost that must be paid each month whether sales take place or not? Fixed Costs Variable Costs Revolviong Costs	4. If our fixed costs are $95,000 and the variable cost percentage is 45%, what is our break-even point? $150,435.62 $172,727.27 $183,953.65