In the previous two blogs we have discussed the evaluation questions up to Breakeven.  In this blog we look at the breakeven analysis and the overheads.

The formula for breakeven is:

Fixed Costs X 100

______________

Gross Profit Margin

Sales                        = £3,000,000

Direct Costs            = £1,200,000

Fixed Costs             = £1,080,000

Breakeven Sales     = £1,800,000 or £150,000 per month

(Gross margin is 60% so £1,080,000/.6 =£1,800,000)

If the business manufactures identical items – How many items must be produced and sold for breakeven each month?

The formula is:

Fixed costs for month

_______________

Gross Profit.

Fixed Costs                              = £60,000 p.m.

Sale price per item                  = £2-60p

Direct Cost per item                = £1-00p.

Breakeven number of items   =  37,500  items.

(Gross profit is £1.60 each item so £60,000/£1.6= 37,500)

Fixed Costs.

• Is a Cost Income ratio in place?
• How do individual lines compare to last year’s “actuals”?
• What cost savings are proposed?
• Have budgets been agreed for Marketing, Repairs & Maintenance, Training etc?
• What assumptions have been made for utility costs and has research been conducted to identify cheaper providers?
• Insurance costs – have they “shopped around” for other providers?
• When is rent review due?
• Travel costs – how can these be reduced?
• How many staff under Administration costs?

Net Profit before depreciation.

• Did the business have a target?
• How does this compare to last year and the sector average?
• Is the retained cash flow sufficient to reduce the borrowing?

This list is not meant to be exhaustive – the message is

“Act as Devil’s Advocate” and ask questions but listen to the answers and if it leads to another question – ASK IT.