Break Even Analysis and Cash Flow Analysis is Critical – Today’s Economy
In this tough economy, it is important for the business owner to review two critical analytical tools to ensure the success of his/her firm.
Break Even Analysis and Cash Flow Analysis is Critical – Break Even Analysis
Let’s take a look at how increases and decreases in sales and expenses affect your bottom line.
It is very helpful to breakdown expenses into “fixed” and “variable” categories to better understand how each expense category is affected by an increase/decrease in sales. Fixed expenses are those that remain level/constant regardless of the sales level. Variable expenses are those that will go up or down in relation to a change in sales. Some expenses have both fixed and variable aspects to them.
Examples of “fixed” expenses are rent (not tied to a percentage of sales), telephone, depreciation, most utilities and administrative salaries. Examples of “variable” expenses are sales commissions (tied solely to a percentage of sales), cost of goods sold, shipping expenses and supplies. Examples of expenses that have both fixed and variable aspects to them include rent (which may have a fixed portion and a portion based on a percentage of sales, license/franchise fees, sales commissions (commissions paid once sales reach a certain level) and insurance (premium based on sales).