Presented by Ed Mendlowitz, CPA, Partner

Presented to:

EAST BRUNSWICK PUBLIC LIBRARYBUSINESS RESOURCE CENTER

For more information, please contact:

Edward Mendlowitz, CPA • One Spring Street | New Brunswick, NJ 08901

732.828.1614 • emendlowitz@withum.com • www.edwardmendlowitz.com

WithumSmith+Brown, PC Certified Public Accountants and ConsultantsNew Jersey. New York. Pennsylvania. Maryland. Florida. Coloradow i t h u m . c o m

Edward Mendlowitz

Edward Mendlowitz, CPA, PFS, ABV, CFF, CGMA, CITP is a partner in WithumSmith+Brown and a member of the American Institute of CPAs, NJ Society of CPAs, and NYS Society of CPAs. Currently he is on the NYSSCPA Estate Planning Committee, and was the Chairman of the committee that planned the NYSSCPA’s 100th Anniversary. Mr. Mendlowitz has authored nineteen books and edited four others, and has written hundreds of articles for business and professional journals and newsletters. He is a contributing editor to

PPC’s 706/709 Deskbook, AICPA Management of Accounting Practice Handbook, Corporate Controller’s Manual and Wiley’s Handbook of Budgeting and is on the editorial board of Bottom Line/Personal newsletter. He appears regularly on television news programs and has been quoted in almost every major newspaper and periodical in the United States. He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Mr. Mendlowitz is accredited in business valuation, certified in financial forensics, and is designated as a personal financial specialist by the American Institute of Certified Public Accountants. Mr. Mendlowitz advises owners of privately held businesses on how to be more effective while earning greater profits and creating fun and excitement in the business. Mr. Mendlowitz can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, Tel: 732.964-9329, e-mail: emendlowitz@withum.com.

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5 Numbers You Need to Know to Run Your Business Better

Edward Mendlowitz, CPA WithumSmith+Brown, P.C., CPAs

No one goes into business out of a desire to spend hours plodding through mountains of accounting and bookkeeping records. But while your top priority is providing, developing or selling your product or service, don't ignore the paperwork that your bookkeeper or accountant sends you. Reason: You'll never have a clear idea of what is really happening in the business. Purchases and payroll costs may be spiraling out of control -- but without the necessary information, you won't know how much trouble you're in until a crisis is upon you.

BETTER WAY You don't need a stack of paper to tell you how your business is doing. All it takes is a few key numbers -- delivered to you monthly on one sheet of paper. Spend three minutes going over those numbers, and you'll know how the business is doing... what your position is in the marketplace... and how you're likely to perform in coming months You won't need outside help to generate the numbers -- your bookkeeper can do it. Or you can do most of it yourself, using one of the excellent small-business accounting software programs such as QuickBooks or Peachtree. Five numbers you need...

1. Cash 2. Sales 3. Payroll 4. Purchases (material bought that will be resold) 5. Break-even point

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1 Cash

Cash balances. Cash flow. Cash changes. No matter what anyone tells you, cash is the bottom line number you must know. Simplistically, knowing your cash balance gives you a sense of how you are doing – it goes up you are making money – it goes down you are losing money. Of course not everything is that simplistic. There are factors such as accounts receivable and inventory that can increase and have your profits

absorbed there. You can have accounts payable decrease also absorbing your profits. So can unfinanced equipment purchases. I have seen many extremely profitable businesses consistently plow the profits back into the company and even borrow to pay the income taxes and take next to nothing out for themselves for their personal net worth – and then the business hits a losing streak and doesn’t have the internal or personal resources, i.e. cash to meet the challenges it is confronted with hastening the decline. Profits in the true sense should be measured in the increase or decline of cash balances. The owners should become sensitive to cash changes and should measure the profitability of their business by actual cash flow and not by the accountants’ definition of profits. Most financial statements include a statement of changes in cash balances. This is usually skipped over with the major attention being given to the balance sheet and profit and loss statement. The statement of cash flows should be reviewed carefully to see where the profits are being absorbed and what can be done to reverse downward trends in the cash balances.

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Daily Cash Balance Report

Company nameDaily Bank Account TransactionsMonth of_________________________

All amounts should be cumulative for month except balances

Date Cash receiptsCash

disbursementsCheckbook

balance Comments

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Daily Cash Balance Report with Held Checks

Company nameDaily Bank Account TransactionsMonth of_________________________

All amounts should be cumulative for month except balances

Date Cash receiptsCash

disbursementsCheckbook

balance

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Daily Flash Numbers’ Report Sample 1

Company nameDaily Flash NumbersMonth of_________________________

All amounts should be cumulative for month except balances

DateCash

receipts

Cash disburseme

ntsChkbook balance

Sales or billing

amount

Accounts receivable balance

Expected collections in next 4 weeks

Accounts payable balance

Expected payments in next 4 weeks Comments

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Daily Flash Numbers’ Report Sample 2

Client's nameDaily Flash Numbers

Month of_________________________

All amounts should be cumulative for month except balances

DateCash

receipts

Cash disburseme

ntsChkbook balance

Transfers from

Company A Sales PchsesInventory balance

Accounts receivable balance

Expected collections in next 4 weeks

Accounts payable balance

Expected payments in next 4 weeks

Orders in house and

delayed shipments

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2 Sales

Because sales are usually the biggest number the business has to report, everybody looks at them. But just looking at the raw sales figures won't tell you anything. You must break them down to get any real value. Have your bookkeeper start tracking average sales per day -- compared with last month and last year. These comparisons will tell you very quickly whether the trend of sales -- in dollars -- is

up or down. Next, you need the number of units sold. If you're in a service business, the appropriate number would be hours billed. Key: Sales by dollars could be up simply because your prices are higher, even though your market share is slipping. But sales by units can show you whether you are gaining or losing market share. Your bookkeeper can generate unit sales figures by counting the units sold or billed against the invoices each month. Average invoice size. This statistic is overlooked by most businesses. Yet it's crucial that you keep on top of whether your average invoice is larger or smaller than it was one year ago... or five years ago. If sales are growing but average invoice size is smaller than five years ago, you may have a problem.

Example: One company found that total sales were substantially higher than five years ago, but the average invoice was smaller. It turned out the company was selling so many more items than five years ago that they couldn't keep every item in stock. Instead of an entire order being filled with one shipment, the order was more likely to be filled in a series of partial shipments.

Problem: Filling orders with several partial shipments raises shipping costs. It also makes customers less satisfied and less confident they will get what they order in a timely manner. The problem had developed so gradually, the company never noticed until it began tracking average invoice size. Doing the average invoice calculation will take your bookkeeper only a few minutes each month. Simply take the invoice number at the beginning of the month. Subtract that from the invoice number at the end of the month. Divide the result by total sales.

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3 Payroll Most business owners look at the total payroll in dollars and go no further. But -- payroll numbers are useful only if you drill down several levels to determine...

Head count. I tell clients to keep track every month of the total head count of the business -- whether it's three, 10 or 100 employees. On a year-to-year basis, the head count can be very revealing. First, it tells you whether employment is growing faster than you realized. Second, by comparing head count with unit sales, you can measure worker productivity. If there is growth in units sold, your payroll is in good shape. If growth of units per employee declines, you have a problem that needs immediate attention.

Overtime. Have your bookkeeper create a separate general ledger account for overtime wages. A quick look at that number every month shows you immediately whether your overtime is moving higher or lower. Note that the change is what is important, not the actual amount since many businesses through unstated convention provide the opportunity for certain employees to earn additional income by allowing them a fixed amount of weekly overtime. Noting the changes and comparing them to increased or decreased production provides a check on whether it is valid or just creeping up.

Payroll in most businesses is a fixed overhead item – not belonging in variable or adjustable direct cost categories – and management’s thinking. In most businesses, payroll, other than sales and office payroll, is reflected as a percentage of sales indicating that it changes in a uniform percentage as sales increase or decrease. However, that is not usually reality. Businesses cannot turn on and off payroll as sales or production ebbs and tides – making it a fixed overhead. Even overtime cannot always be reduced so quickly.

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Calculating actual payroll costs In controlling payroll costs it is very important to know what the actual payroll costs per hour are. Once that is determined, the labor factor can be calculated with some degree of accuracy. Following is a schedule of the typical number of days worked.

This is a model of a way to calculate the labor cost per hour. As such, it needs to be adapted by each business to fit their situation. For instance, many manufacturing businesses use an 8 hour day – with almost no “non-direct labor days” but they should allow for down time waiting for materials or for a machine to be repaired. The big picture point here is that we don’t believe personnel works as much as the owners believe they do.

Number of Days in Year 365Less: W eekends 104 Vacations 10 S ick Days 5 Holidays 10 Non-allocable personal days 3 132

Total W ork Days 233

Less 15% for non-direct labor days 33

Total Days of B illing Available 200

Number of Hours W orked in a Day 7

Less Time Not W ork ing (breaks, telephone, etc.) 1

Hours W orked 6

Number of Chargeable Hours in a Year 1200

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The employee cost information has to be collected. Let us assume the person makes $50,000 base salary.

The total cost divided by number of hours reflects the actual cost per employee worked. In the illustration above, it comes to $57.19. Since this is only the amount that covers the direct employee cost, an overhead factor has to be added to this. In general the total overhead for the year should be divided by the expected numbers of hours that will be worked and that amount should be added to the employees direct cost per hour. If employees are able to work a greater number of hours, then obviously the entire amounts billed out will result in additional profits, as there will be no direct cost attributed to those direct hours. In a service businesses it might also be typical for some of the non-working time to be billed and considered as part of the working time. For instance, taking a break to go to the restroom or a quick call a couple of times a day to a spouse. In those cases the actual billed hours might be higher, and the total of the number of hours worked would thereby be adjusted.

% of Salary Costs

Base Salary 100% 50,000

FICA 6.20% 3,100

Medicare 1.45% 725

UI/DI$1000 per employee 1,000

Workers Comp 2.00% 1,000

Liability Insurance 2.00% 1,000

Federal Unemployment Insurance$56 Per

employee 56

Pension 3.50% 1,750

Medical Insurance$5000 Per employee 5,000

Other Direct Costs of having employees (office, telephone, supplies, coffee machines) 10.00% 5,000

Total Cost 68,631

Chargeable Hours 1,200

Cost Per Hour 57.19

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Overhead cost allocation Following is a summary of the cost information presentation.

A comment about the hours: This company typically includes in their payroll structure a fixed amount of overtime hours for each department. These hours have been figured in when the total hours were calculated. The overtime premium is also included in the payroll costs. To the extent that overtime hours and costs exceed the predetermined amounts, there will be variances which will be reconciled against the actual periodically.

Payroll

Payroll taxes and

fringes (30% ave.)

Total payroll

Other overhead

costs Total % of total

Total payroll and overhead Total hours

Cost per hour

including overhead

Overhead 2,600,000 780,000 3,380,000 4,000,000 7,380,000 40.62%Dept A 4,000,000 1,200,000 5,200,000 5,200,000 28.62% 8,756,627 222,500 39.36Dept B 2,200,000 660,000 2,860,000 2,860,000 15.74% 4,816,145 175,000 27.52Dept C 800,000 240,000 1,040,000 1,040,000 5.72% 1,751,325 32,500 53.89Shipping 1,300,000 390,000 1,690,000 1,690,000 9.30% 2,845,904 89,700 31.73

Not includedSalesAdministration

Total 10,900,000 3,270,000 14,170,000 4,000,000 18,170,000 100.00% 18,170,000 519,700 34.96

Overhead as a % of Labor 68.40%

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4 Purchases

Most businesses spend a lot of time and money keeping track of inventory. In my view, that's time and money that could be better spent. You don't purchase to build inventory. You're only buying what you need to create the products your business sells. So -- overall inventory levels don't mean anything. All you really need to know is whether you're buying just to sustain sales. What to do: The only important inventory numbers are purchases of your primary raw material. Even if you buy many types of material for your business, two or three items probably

account for 80% of your total purchases. Collect the monthly costs of purchases of those main raw materials, and divide them by sales. Compare the current month's total with the past three months to determine if inventories of raw materials are rising. If the ratio of purchases to sales goes up consecutively for three months, you have a problem. Maybe you're buying too much. Maybe the prices you're paying for raw materials are too high. Maybe the price you're charging customers is too low. One way or another, you must fix what's wrong.

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“Trend Analysis” generated by QuickBooks® - how to use and benefit from it

Introduction

1. Prepare financial reports under company & financial: profit & loss standard for this fiscal year to date with columns: month.

2. Do the same with the balance sheet standard also with columns: month.

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Profit & loss statement 3. Look at the total column at the extreme right of the profit & loss statement. This

gives the profit & loss report for the entire period. 4. Look at the top to see the gross sales or revenues. This gives you a sense of the

size of the business. 5. Next look at the bottom line – this gives you the net income or loss for the period.

Now you know if the company is profitable and how much, or if it lost money. 6. Next comes the “Trend” part. Slide your eyes across each column looking to see

monthly variations. Any variation (either high or low) should be look at to see if anything unusual or out of the ordinary occurred during that month. If so, look for the reasons or answers. The reasons can be easily researched by placing the cursor on the amount until it changes to a magnifying glass with a “Z”. A left click will show you the detail of the entries making up that total for that month. If you need further information you can look at the backup information such as the check, invoice or bill for the amount you don’t understand.

7. Keep in mind that you are looking for larger items and larger differences. A

200% variance on a $100 item will not yield you as much benefit as an 8% variance on a $20,000 item. Keep the big picture in mind.

8. One way of starting and using your time profitably and efficiently is to

concentrate on the more important and meaningful items until you get a comfortable grasp of what makes up those items. For example, for most businesses the three major items are sales, purchases or direct costs, and payroll costs. Telephone, office supplies and garbage removal no matter how large the differences are not significant. An exception might be bank charges where there usually shouldn’t be anything more than a minimal amount. Any change there could indicate a declining cash balance where the bank is paying checks you issued against uncollected funds or charges for bounced checks. Also, don’t close your eyes to obviously incorrect or illogical amounts.

Balance sheet

9. Look at the shareholders’ equity or capital account at the bottom of the extreme right column. This gives the net worth of the company, per the accounting records. Net worth can be called “capital,” “members’ equity,” “stockholders’ equity” or any similar terminology.

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10. Next, also at the extreme right column, look at the total current assets and subtract

the total current liabilities. This gives the working capital. Positive working capital is good while negative is bad. The higher the positive, the better. The higher the negative, the worse it is.

11. Compare the working capital to the net worth. The closer they are to each

other, the stronger the credit worthiness of the company. 12. Another item to look at is cash, to see the trend if it is rising or dropping. 13. Next comes the “Trend” part. Note that on the profit & loss statement the

monthly amounts represent the transactions for the month. On the balance sheet the amounts are the month end balances of each asset, liability and equity account. Slide your eyes across each column looking to see monthly variations. Any variation (either high or low) should be look at to see if anything unusual or out of the ordinary occurred during that month. If so, look for the reasons or answers. The reasons can be easily researched by placing the cursor on the amount until it changes to a magnifying glass with a “Z”. A left click will show you the detail of the entries making up that total for that month. If you need further information you can look at the backup information such as the check, invoice or bill for the amount you don’t understand.

Purpose of trend analysis

14. The purpose of the trend analysis is to detect trends before they become evident. Favorable trends can be taken advantage of by flushing out and exploiting the reasons to help the business grow and be more profitable. Unfavorable trends can be uncovered before they become entrenched in the business and embedded in the operations or culture making them harder to halt or reverse.

15. Because we are looking to spot trends, it is important for the numbers to be

current and as close to real time as possible. For that reason the best time to look at the trend is as soon as the month ends – not waiting for bank statements so the cash accounts could be reconciled, or late receiving vendor invoices to be entered, or inventory to be counted. The trend is a forward thinking tool using historic data to guide the thinking or analytical process. Don’t confuse the numbers reviewed with deliberatively prepared historic tax return numbers or GAAP1 basis financial statements.

1 Generally Accepted Accounting Principles

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16. The use of the trend analysis is to support strategic goals and enable actions to take place much more quickly than they could if you had to wait for exact numbers. Accuracy in the numbers is not as important as the use, thinking, planning and discussion that would accompany a trend analysis.

17. Another goal, albeit a lesser1 one, is to attain completeness and records as up to

date and as accurate as possible. The month end deadline fosters this. For those without QuickBooks® A “trend” analysis can be prepared by many other accounting programs. For those without that ability, Excel® and other spreadsheet programs can be used. What is required is to enter the balance sheet and profit and loss or trial balance amounts each month and then configure the spreadsheet program to transfer the monthly numbers into the trend format. The trend format has each month side by side. We have found that setting up the spread sheet with a section to enter the cumulative monthly information in consecutive columns, and a second section with the monthly data obtained by subtracting the previous month’s cumulative amounts from the current month’s amounts will provide the monthly data in a neat column by column format. Using spreadsheet software creatively, you can get a myriad of data in usable form and charts and graphs that clearly and succinctly tell the story and lead you in the correct direction. Following are some graphs that quickly illustrate the entire story: Retail business that moved from a high rent district, to a lower rent area. Notice how the gross profit dropped and after taking into account other costs such as payroll and fixed expenses, the business is no longer viable.

1 Only slightly lesser

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Sales, Gross Profit and Rent

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2003 2004 2005 2006 2007

Year

Sales Rent Gross Profit

SssalS

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Detecting, observing and reacting to trends Getting the information is useless unless it is used! Trends are always present – but they need to be recognized and uncovered to be of any use. And then that knowledge needs to be used to change what is being done. It is important for the business owner to understand that there are choices. Doing nothing is a major choice, and carries with it the natural consequences of that path. One method of illustrating the "do nothing" alternative is to project the business’ current operations and trends. Following is an illustration of a "do nothing" scenario. When you look at the projections keep in mind that this is a good business. It is increasing its sales annually, and is profitable.

BT Manufacturing Company Income statement summary - 2002 to 2012 Assumptions used: % increase per year Sales 3% Cost of sales 4% Operating expenses 6% # units sold 0% (in Thousands except price per unit)

Current year

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Actual Actual Actual Actual Actual Projected Projected Projected Projected Projected ProjectedSales $4,000 $4,120 $4,244 $4,371 $4,502 $4,637 $4,776 $4,919 $5,067 $5,219 $5,376Cost of sales 2,400 2,496 2,596 2,700 2,808 2,920 3,037 3,158 3,285 3,416 3,553Gross profit 1,600 1,624 1,648 1,671 1,694 1,717 1,739 1,761 1,783 1,803 1,823 Operating expenses 1,000 1,060 1,124 1,191 1,262 1,338 1,419 1,504 1,594 1,689 1,791Officer's salary, pension, perks 300 300 300 300 300 300 300 300 300 300 300

Net income before taxes $300 $264 $224 $180 $132 $79 $21 ($42) ($111) ($186) ($268)

# units sold 200 200 200 200 200 200 200 200 200 200 200

Average price per unit $20.00 $20.60 $21.22 $21.85 $22.51 $23.19 $23.88 $24.60 $25.34 $26.10 $26.88

That is why the “5 #” works – short, easy and quick to absorb and react to!

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The above business has “settled” into a niche and the owner has become somewhat complacent, not wanting to “upset the applecart” with any kind of changes. At 200,000 units per year the business is not losing unit sales, but if it is in an industry that is growing, then the company is losing market share. Additionally the costs of sales and operating expenses are increasing at a faster rate than the sales. Projecting the operations forward five years shows a loss on the horizon. Left to its own equilibrium or inertia this business will run itself out. The final result will be loss of income, assets and value, and a succession possibility. Now, what about businesses whose sales have dropped or who had a really bad year mixed in somewhere in that ten year period? Following are two graphs depicting data shown on the above income statement summary. How much other information does anyone need to understand that the company is a loser?

BT Manufacturing Company

(1,000,000)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US Dollars

Sales Cost of Sales, operating costs and officer salary Net income

Net income % of sales

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

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5 Break-even point

Break-even analysis tells you what sales volume you must hit each month to equal your fixed and variable expenses. Until you reach break–even, you're losing money. Given its importance, you'd think every business would make determining its break–even point a top priority every month. In my experience, most businesses don't know their break–even point.

Best: Have your accountant create an internal system for computing break–even. Once the system is in place, your bookkeeper can apply it each month to generate up-to-date break–even figures. Result: By taking a quick glimpse at your break–even number each month, you'll know whether you made or lost money that month. Compare it with past months to see whether business is improving or slipping. If you're hitting break–even, and then some, great. If not, you know you have a problem. Because you are tracking your break–even point on a monthly basis, there's time for you to pinpoint the problem and resolve it before serious damage is done.

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Break even analysis

Break-even analysis is a budgetary process designed to tell you how much sales you need to break even and how much you will make or lose if you exceed or fall short of this "break-even" sales amount. Properly used it can become a very potent tool. To do a break even analysis, all costs and expenses must be

separated into "fixed" and "variable" categories. Designations such as "Costs of Goods Sold", "Selling" or "General and Administrative" are irrelevant. Fixed costs are those that will occur whether or not there are sales or no matter what the sales volume. Rent, secretarial and telephone are examples of items that are generally considered fixed. Variable costs are those incurred because a sale was made. Materials and commissions are considered variable costs. Fixed items should be stated in dollars and variable costs as a percentage of sales. If a product sells for $10 and has a variable cost of $6, then the variable percent is 60%. On the same token, $4 is available to recover fixed costs and earn a profit. We will call it the "fixed cost and profit accumulator" (FCPA) and state it as a percent of sales. So, in the above example, the FCPA is $4/$10 or 40%. To determine the break even point, the fixed cost dollar amount is divided by the FCPA. Multiplying sales amounts over the break even point by the FCPA will tell what the profit should be. Multiplying sales under the break even point by the FCPA will tell the dollars lost. This calculation assumes that the fixed costs will not change from period to period. If they do, then adjustments have to be made in the formula. For example, if there is a major repair, the break even analysis can tell the client how much additional sales are needed to recover that cost. Just divide the additional cost by the FCPA. Generally, the break even point should stay about the same from month to month. However, you should be aware and sensitive to extraordinary items and changing conditions and adjust the formula accordingly. Following this page is a comparison between a conventional form of financial statement and break-even form.

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Fixed Variable

Sales 150,000 100.00%

Cost of Goods SoldInventory-Beginning 135,000Purchases 50,000 25.00% * 25.00%Direct Labor 30,000 20.00% 3,000 18.00%Indirect Labor 4,000 2.67% 4,000Payroll taxes and fringes 8,500 5.67% 1,750 4.50%Rent 5,000 3.33% 5,000Utilities 2,000 1.33% 2,000Insurance 1,000 0.67% 1,000Factory supplies 2,000 1.33% 2,000Depreciation 4,500 3.00% 4,500

242,000Less: Inventory - end 147,500Total Cost of Goods Sold 94,500 63.00%

Gross Profit 55,500 37.00% Selling and Shipping Expenses

Sales manager 3,000 2.00% 3,000Sales commissions 12,000 8.00% 8.00%Shipping salaries 3,000 2.00% 2.00%Payroll taxes 3,600 2.40% 600 2.00%Other selling costs 3,400 2.27% 3,400Total 25,000 16.67%

General and AdministrativeOfficers' payroll 10,000 6.67% 10,000Office payroll 5,000 3.33% 5,000Payroll taxes 3,000 2.00% 3,000Rent and utilities 1,000 0.67% 1,000Telephone 1,000 0.67% 1,000Other general and admin. 2,000 0.67% 2,000Depreciation 1,000 0.67% 1,000Total 23,000 15.33%

Total Selling & General and Admin. 48,000 32.00%Net Income Before Provision for Taxes 7,500 5.00%Totals 53,250 59.50%

$ %

Conventional Formof

Financial Statement $ %

Manufacturing Co., Inc.Break Even Analysis

Per Month

Break-even Form

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Weighted Average Following are illustrations showing the effect of the sales mix of products with different gross profits, and what happens when the sales mix is changed. A weighted average can be obtained for any category where there is a mix of costs or dollar amounts.

Weighted Average of Sales

gross profit % of weightedItem % total sales average

1 40.00% 20.00% 8.00%2 30.00% 65.00% 19.50%3 20.00% 15.00% 3.00%

Weighted average gross profit 30.50%

Weighted Average of Sales(Change in Sales Mix)

gross profit % of weightedItem % total sales average

1 40.00% 10.00% 4.00%2 30.00% 25.00% 7.50%3 20.00% 65.00% 13.00%

Weighted average gross profit 24.50%

* - Purchases percent is arrived at as follows: Inventory - Beginning 135,000 Purchases 50,000 Less inventory -End (147,500) Net purchases 37,500 Percent of sales 25.00%

Break even sales calculation Fixed costs 53,250 Divided by (1-59.50%) Equals 131,481

Difference between break even and actual sales Actual sales 150,000 Less break even sales 131,481 Difference 18,519 Proof (Difference multiplied by (1-59.50%)) 7,500

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Effect and sensitivity of changing costs The following shows the effects of changes in variable percents and fixed costs.

Determining whether to raise or lower prices to make more money There is always a conflict in trying to determine whether prices should be increased to make more money, or decreased to create a greater demand so the business could make more money. This can be calculated using simple arithmetic based on the break even analysis model and applying it to a guess of how your customers would react versus the potential to gain added business. The calculations also require converting the amounts used from dollars to product units. The following charts show the effect of looking at units rather than dollars. Notice the extreme differences between the results in dollars and units.

Effect of a change in variable percents Profit ifBreak-even sales are

% of sales sales $150,00056.50% 122,414 12,00057.50% 125,294 10,50058.50% 128,313 9,00059.50% 131,481 7,50060.50% 134,810 6,00061.50% 138,312 4,50062.50% 142,000 3,000

Effect of a change in fixed costs Profit ifBreak-even sales are

$ per month sales $150,00050,250 124,074 10,50051,250 126,543 9,50052,250 129,012 8,50053,250 131,481 7,50054,250 133,951 6,50055,250 136,420 5,50056,250 138,889 4,500

1398be6

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Determining whether to raise or lower pricesin order to make more money

Regular gross profit before price changes: 40.00% % increaseneeded in

% # physical physical unitsincrease in units that sold to earn

$ sales total $ sales have to be same $ amt. of $ amount $ amount new needed to needed sold to gross profit

% decrease new price of cost of gross profit earn $400 to earn same earn $400 as before pricein price per unit per unit gross profit % gross profit gross profit $ gross profit decrease

0.00% $100.00 $60.00 $40.00 40.00% $1,000.00 0.00% 10.0 0.00%5.00% $95.00 $60.00 $35.00 36.84% $1,085.71 8.57% 11.4 14.29%

10.00% $90.00 $60.00 $30.00 33.33% $1,200.00 20.00% 13.3 33.33%15.00% $85.00 $60.00 $25.00 29.41% $1,360.00 36.00% 16.0 60.00%20.00% $80.00 $60.00 $20.00 25.00% $1,600.00 60.00% 20.0 100.00%25.00% $75.00 $60.00 $15.00 20.00% $2,000.00 100.00% 26.7 166.67%

Regular gross profit before price changes: 40.00% % decrease inphysical units

% # physical sold permitteddecrease in units that to earn

$ sales total $ sales have to be same $ amt. of $ amount $ amount new needed to permitted sold to gross profit

% increase new price of cost of gross profit earn $400 to earn same earn $400 as before pricein price per unit per unit gross profit % gross profit gross profit $ gross profit increase

0.00% $100.00 $60.00 $40.00 40.00% $1,000.00 0.00% 10.0 0.00%5.00% $105.00 $60.00 $45.00 42.86% $933.33 -6.67% 8.9 -11.11%

10.00% $110.00 $60.00 $50.00 45.45% $880.00 -12.00% 8.0 -20.00%15.00% $115.00 $60.00 $55.00 47.83% $836.36 -16.36% 7.3 -27.27%20.00% $120.00 $60.00 $60.00 50.00% $800.00 -20.00% 6.7 -33.33%25.00% $125.00 $60.00 $65.00 52.00% $769.23 -23.08% 6.2 -38.46%

26

Determining whether to raise or lower pricesin order to make more money

Regular gross profit before price changes: 30.00% % increaseneeded in

% # physical physical unitsincrease in units that sold to earn

$ sales total $ sales have to be same $ amt. of $ amount $ amount new needed to needed sold to gross profit

% decrease new price of cost of gross profit earn $300 to earn same earn $300 as before pricein price per unit per unit gross profit % gross profit gross profit $ gross profit decrease

0.00% $100.00 $70.00 $30.00 30.00% $1,000.00 0.00% 10.0 0.00%5.00% $95.00 $70.00 $25.00 26.32% $1,140.00 14.00% 12.0 20.00%

10.00% $90.00 $70.00 $20.00 22.22% $1,350.00 35.00% 15.0 50.00%15.00% $85.00 $70.00 $15.00 17.65% $1,700.00 70.00% 20.0 100.00%20.00% $80.00 $70.00 $10.00 12.50% $2,400.00 140.00% 30.0 200.00%25.00% $75.00 $70.00 $5.00 6.67% $4,500.00 350.00% 60.0 500.00%

Regular gross profit before price changes: 30.00% % decrease inphysical units

% # physical sold permitteddecrease in units that to earn

$ sales total $ sales have to be same $ amt. of $ amount $ amount new needed to permitted sold to gross profit

% increase new price of cost of gross profit earn $300 to earn same earn $300 as before pricein price per unit per unit gross profit % gross profit gross profit $ gross profit increase

0.00% $100.00 $70.00 $30.00 30.00% $1,000.00 0.00% 10.0 0.00%5.00% $105.00 $70.00 $35.00 33.33% $900.00 -10.00% 8.6 -14.29%

10.00% $110.00 $70.00 $40.00 36.36% $825.00 -17.50% 7.5 -25.00%15.00% $115.00 $70.00 $45.00 39.13% $766.67 -23.33% 6.7 -33.33%20.00% $120.00 $70.00 $50.00 41.67% $720.00 -28.00% 6.0 -40.00%25.00% $125.00 $70.00 $55.00 44.00% $681.82 -31.82% 5.5 -45.45%