A Lenders view of Financial Forecasts Part 3 of 3) – the Breakeven and Overheads

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.