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
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)
- 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.