Business Finance Was Never This Easy
by
Book Cover & Preview Text
Owners and managers always like to know how much business (sales) must be done to break-even (usually at the pre-tax level). Breaking even means at what level of sales will my pre-tax earnings equal zero; no profit and no loss. It means that all costs and expenses equal the sales value. A business puts together a financial plan for a period of time or it reviews the latest year’s operation. Based upon this data, the company can determine what sales must be to break-even. My preference is that it should be based upon the Financial Plan, which is the future and it incorporates business assumptions and underlies potential investment expenditures. To provide an example, let’s use the Financial Plan created in Chapter Ten. (See below.) We have restructured the Financial Plan Income Statement into categories of Fixed, Variable, and Partially-Variable costs and expenses. I have so indicated by placing the F, V or P next to each account line. Some are subject to interpretation, but it depends upon exactly what is placed in each account. In summary, total fixed expenses (including half of the P expenses) are $715,091 for the year. To achieve the $7,300,000 in sales (which, too, are truly variable), $6,118,996 must be spent. Thus, for each dollar of sales revenue generated, 83.8 cents must be spent, with 16.2 cents (%) generated as marginal profit, which contributes to the coverage of fixed expenses. So, in order to break even, how many sales dollar units must we sell at 16.2% variable profit contribution to cover the $715,091 of fixed expense? Answer: $715,091 / .162 = $4,420,109. The proof is offered in the schedule. Break-even is $4,420,000 annually or $368,000 per average month or since $4,420,000 is 60.5% of the $7,300,000 sales estimate, if sales are level throughout the year, on July 10th all the fixed expenses should be covered with the balance of the sales generating the $465,913 in pre-tax earnings. Now we know what the break-even point is. However there are other uses for this analysis. If XYZ were to hire a clerk at $20,000, how much additional sales must be generated to cover the salary and still maintain the $465,913 forecast? 20,000/ .162 = $123,457 in additional sales above the $7,300,000 forecast. If XYZ wants to earn $600,000 in pre-tax income what sales level must be achieved? First, consider the $600,000 as a fixed cost, and add it to the $715,091; the total is $1,315,000. $1,315,000 / .162 = $8,117,300 (rounding). If XYZ achieves an efficiency improvement (labor and materials) of .5%, what will be the impact? (The variable gross margin increases by .5% to 16.7%) $715,091 / .167. or the break-even point declines to $4,281,985.
Formats
Book Details
About the Book
Business Finance Was Never This Easy
Years of business experience have taught me what business owners, executives and managers require and desire from a finance operation. To that end I have written a new book, Business Finance Was Never This Easy. This is a business finance book that is easy to understand and thoroughly comprehensive.
Find out about business finance, cash flow, financial planning, business investment, and much more in concise, plain, non-technical language. It takes the business executive through the accounting basics then proceeds to financial analysis, financial measuring sticks, business investment analysis (including company market or financial valuation), and product cost. The executive will also learn the three levels of cash flow, the keys to succeed in every business, and financial planning.
Beyond an in-depth discussion of proper business mechanics and techniques, the executive will learn how to make policy decisions and to understand the potential impacts of these policies. It presents and discusses the mechanics, raises and discusses questions regarding financial policies and provides other thought provoking material.
Do you want to become a financial genius? Probably not! But, if you would like to have a good understanding of the financial aspects of your business or, if you would like to impress your co-workers and boss with your finance savvy, then this is the book for you.
Please visit my website: www.hgoldsteinconsulting.com to find out about my consulting services!
About the Author
I have been a chief financial officer or controller of several companies ranging from $5 million to $80 million. My responsibilities included all the accounting, analysis, reporting (to management, ownership and lending institutions), credit and collections, cash management and forecasting, financial analysis and planning, and strategic plan coordination. I was also a senior financial analyst with a NYSE listed company and a management consultant with two top consulting companies. I hold a BA in Economics from the City College of New York, City University of New York and an MBA (Finance) from The Bernard M. Baruch College, City University of New York. I am also an instructor in the Undergraduate and
During my career, I have arranged for loans, have created numerous financial plans and cash management systems. I have also performed financial analyses for major investment projects of up to $50 million, created product costs and profitability measures, and have incorporated all this into financial procedures manuals.
For recreation, I play at golf and I do some bicycle riding (note: neither Tiger Woods nor Lance Armstrong need to worry about me!)