Business Budgeting and Break-Even Analysis PDF

Unit: Economic Foundation_ Market forces 1.5_Venture cost  You’re Some pointless math puns, just because.. 2  Math in business How is math used in the process of creating and/or running a business? What math skills are needed to comple...

Unit: Economic Foundation_ Market forces 1.5_Venture cost  You’re Some pointless math puns, just because.. 2  Math in business How is math used in the process of creating and/or running a business? What math skills are needed to complete the tasks that they identified in the previous activity.  Learning Goal Calculate venture startup budget and conduct a break-even analysis to ensure a venture’s financial viability Budget A plan for wise spending and saving based on income and expenses. Budget Personal budget: allows a Business budget: to family to determine how their allocate resources to different disposable income will be spent projects. Preparin ga Business Budget  Total Cost TC = Fixed cost + Variable cost Fixed Costs: costs Variable Costs: that remain the same costs that changes with the at all levels of levels of output. For example: labour, fuel, output. raw materials, and power. For example: rent, property taxes, interest on loans.  PROFIT = REVENUE - EXPENSES Amount of Money spent on running Sales. the business (wages, supplies). -If profit is negative, it is called a loss. -The goal of a business is to stay solvent in the marketplace. (Solvency: Having the ability to pay your debts and meet financial obligations. ) Budgeting for business Start up budget The money needed to open the business. Budgeting for business Operating budget On going revenues and expenses Budgeting for business Break even point The point at which total cost and total revenue are equal. At this point there is no profit and no loss. source:© Council for Economic Education Budgeting for business Break-even Quantity (BEQ) It’s the minimum amount of units produced that must be sold to break-even with costs Break-even Quantity (BEQ) Formula BEQ = Fixed costs / (Selling price - variable costs per unit) Budgeting for business Break-even Price (BEP) It’s the minimum price you need to charge to cover your costs and make no profit or loss Break-even price (BEP) Formula BEP = [(BEQ X Variable Cost) + Fixed costs ]/ BEQ Budgeting for business Why Calculate Break-even Price (BEP) ? 1. Setting pricing strategies a. Since you know minimum price you need to charge, compare different pricing scenarios and see how they affect your profitability 2. Managing cash flow a. helps to forecast your cash flow and plan for your expenses. You can also use it to identify any potential shortfalls or surpluses and take appropriate actions. 3. Planning for growth a. estimate the impact of adding new products, services, or locations on your break-even point and profitability. Break even analysis- Example You run a bakery and sell cakes for $20 each. Your fixed costs are $2,000 per month, and your variable cost per cake is $5. Calculate the break even quantity & price. Break-even Quantity (BEQ) = Fixed costs / (Selling price - variable costs per unit) = $2000 / ($20 - $5) = 133.33 or 134 cupcakes (Therefore, you need to sell 134 cakes per month to break even) Break-even price (BEP) = [(BEQ X Variable Cost) + Fixed costs ]/ BEQ = [(134 X $5) + $2000 ]/ 134 = $15.15 (Therefore, you need to charge at least $15.15 per cake to cover your costs and make no profit or loss.) Break even analysis- Example You run a bakery and sell cakes for $20 each. Your fixed costs are $2,000 per month, and your variable cost per cake is $5. Calculate the break even quantity & price. Break-even Quantity (BEQ) = Fixed costs / (Selling price - variable costs per unit) = $2000 / ($20 - $5) = 133.33 or 134 cupcakes (You need to sell 134 cakes per month to break even) Break-even price (BEP) = [(BEQ X Variable Cost) + Fixed costs ]/ BEQ = [(134 X $5) + $2000 ]/ 134 = $15.15 (You need to charge at least $15.15 per cake to cover your costs and make no profit or loss.) Handout Venture cost  Entrepreneurship Venture Task: determining the financial strategy of your venture is a necessary part of the Venture Plan Apply What You Know