McLEAN AND CO. Chartered Accountants

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 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email murray@mcleanandco.co.nz                                  Website www.mcleanandco.co.nz

 
 
EMAIL NEWSLETTER  AUGUST 2007
 
 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

 

NEW CLIENTS

We are happy to accept new clients.  We would be happy to assist colleagues and acquantances as new clients.

 

INDEX

  1. Breakeven Analysis

  2. 10 Ways to Increase your Cashflow

  3. Business Branding

 

BREAKEVEN ANALYSIS

If you can accurately forecast your costs and sales, conducting a breakeven analysis is a matter of simple math. A company has broken even when its total sales or revenues equal its total expenses. At the breakeven point, no profit has been made, nor have any losses been incurred. This calculation is critical for any business owner, because the breakeven point is the lower limit of profit when determining margins.

 

Defining Costs

There are several types of costs to consider when conducting a breakeven analysis.  The following are the most relevant

  • Fixed Costs: These are costs that are the same regardless of how many items you sell. All start-up costs, such as rent, insurance and computers, are considered fixed costs since you have to make these outlays before you sell your first item.
  • Variable Costs: These are recurring costs that you absorb with each unit you sell. For example, if you were operating a service station where you had to buy petrol from a petrol  company for $1.30 per litre, then that price represents a variable cost. As your business and sales grow, you can begin appropriating labour and other items as variable costs if it makes sense for your industry.
 

Setting a Price

This is critical to your breakeven analysis; you canít calculate likely revenues if you donít know what the unit price will be. Unit price refers to the amount you plan to charge customers to buy a single unit of your product.

  • Psychology of Pricing: Pricing can involve a complicated decision-making process on the part of the consumer, and there is plenty of research on the marketing and psychology of how consumers perceive price. 
  • Pricing Methods: There are several different schools of thought on how to treat price when conducting a breakeven analysis. It is a mix of quantitative and qualitative factors. If youíve created a brand new, unique product, you should be able to charge a premium price, but if youíre entering a competitive industry, youíll have to keep the price in line with the going rate or perhaps even offer a discount to get customers to switch to your company.

    One common strategy is "cost-based pricing", which calls for figuring out how much it will cost to produce one unit of an item and setting the price to that amount plus a predetermined profit margin. This approach is frowned upon since it allows competitors who can make the product for less than you to easily undercut you on price. Another method is  "price-based costing" which encourages business owners to "start with the price that consumers are willing to pay (when they have competitive alternatives) and whittle down costs to meet that price." That way if you encounter new competition, you can lower your price and still turn a profit. 

 

To conduct your breakeven analysis, take your fixed costs, divided by your price, minus your variable costs. As an equation, this is defined as:

Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs)
This calculation will let you know how many units of a product youíll need to sell to break even. Once youíve reached that point, youíve recovered all costs associated with producing your product (both variable and fixed).

Above the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits. As an equation, this is defined as:

Unit Contribution Margin = Sales Price - Variable Costs
 

Limitations

It is important to understand what the results of your breakeven analysis are telling you. If, for example, the calculation reports that you would break even when you sold your 500th unit, decide whether this seems feasible. If you donít think you can sell 500 units within a reasonable period of time (dictated by your financial situation, patience and personal expectations), then this may not be the right business for you to go into. If you think 500 units is possible but would take a while, try lowering your price and calculating and analyzing the new breakeven point.

Alternatively, take a look at your costs Ė both fixed and variable Ė and identify areas where you might be able to make cuts.

Lastly, understand that breakeven analysis is not a predictor of demand, so if you go into market with the wrong product or the wrong price, it may be tough to ever hit the breakeven point.

 

10 WAYS TO INCREASE YOUR CASHFLOW

1.  Reduce stockholding
2.  Lease rather than Buy
3.  Conduct a pricing review
4.  Generate invoices earlier
5.  Early payment discounts
6.  Regular payments direct to your account
7.  Pay invoices when due
8.  Spread your purchases
9.  Join forces
10. Managed account receivables

1.  Reduce Stockholding

Inventory ties up cash. Look to reduce stockholding by managing inventory closer. Avoid buying more than you need, especially when offered supplier discounts, and at the end of each month.

2.  Lease rather than Buy

Leasing generally costs more than it does to buy outright, but with leasing you pay as you go on a monthly basis thatís easier to budget for and manage. Buying especially large ticket items can be a drain on cash.

3.  Conduct a Pricing Review

Review all prices to ensure they reflect current costs. Look to increase prices by small percentages as they often go unnoticed, and can have a positive impact on your cash position.

4.  Generate Invoices earlier

Donít wait until the end of the week or end of the month before sending out invoices. Some companies pay on invoice and you lose the opportunity for early payment by your customer. Remember, they wonít pay until its charged so the longer you take the longer it is before you get paid.

5.  Early Payment Discounts

Look to pay early if offered an early payment discount. If you are not offered one then ask for one. They can only say no and quite often they may not have even considered it.

6.  Regular Payments direct to your Account

Where your customer has a regular buying pattern with you, try to arrange direct payment into your account.

7.  Pay Invoices when due

Donít make early payments. Only pay on the agreed terms. Try to obtain longer payment terms than you allow.

8.  Spread your Purchases

Use a number of suppliers for your supplies. This ensures you obtain the benefit of supplier promotions provided by competitors and doesnít tie you into long term arrangements that can be counter productive.

9.  Join Forces

Combine the purchasing power of alike companies to increase your buying power. Acting as a co-operative can gain you volume discounts unavailable to you as individual companies.

10. Managed Account Receivables

Consider specialized companies offering to purchase your debtors to provide early release of cash.

 

BUSINESS BRANDING

Branding is important for all businesses. In fact, it is arguably more important for smaller businesses that have to establish trust and a good reputation in the marketplace. From the day you start trading, you are literally making your mark in the marketplace.

It is true that big companies have big resources to support and promote their brand. They can afford to advertise for brand awareness alone. Brands that are recognisable anywhere in the world (such as Toyota, Sony, Coca Cola and Nike) have reached that status only after years of expensive promotion.

On the other hand you may have limited resources to promote your brand and few small businesses can (or should) advertise simply for brand awareness. Most would more sensibly want a more immediate (and measurable) sales result from advertising.

But this doesnít mean that smaller businesses should not make the effort to promote their brand; there are real benefits to be gained from effective branding.

The Benefits of a Good Brand

Successful small business brands are all over the place. For example, the labels on wine, olives or fruit preserves from small producers. Many have grown from tiny beginnings to nationally known products.

The benefits of brand building can be summed up as:

  • Recognition in the marketplace. Consumers prefer and tend to choose brands they recognise.
  • Credibility. The more credible your business, the easier it is to make a sale. Brands can play an important part in establishing your credibility.
  • Reduced risk for the customer. People want reliability and predictability. They choose familiar brands because they know the brands support these qualities.
  • Adding value to your business. The goodwill associated with your brand(s) and associated brand loyalty can grow into an important Ďintangible assetí. That is, part of the value of your business when you come to sell the business or pass it on to others.

Choosing a Brand or Trademark

Here are some tips:

Think long-term. Give careful thought to your brand or trademark. You are likely to invest significantly over the years in promoting it so you need to make sure it will endure. If you plan to export, it will be worth checking that the brand will not have negative or unfortunate connotations in targeted overseas markets.

Get the brand professionally designed. Unless you have design skills, resist the temptation to design the brand logo yourself. Itís important that you look as professional as possible, and investing in professional design skills will pay off in the future. A tip here is to check that the logo will look good on screen as well as on paper. Even if you donít yet have a website, think of the future.

Think about including a slogan in the brand logo. Can you capture in a short but memorable phrase the essence of your competitive advantage? For example, Tourism New Zealand's 100% Pure New Zealand.

Register it. There is little pointing investing in your brand if you do not protect it from imitation. Use the 'search' function on the Intellectual Property Officeís website (left-hand side of the screen, called 'IPONZ database') to check that the brand or trademark you have in mind is not already registered and / or is not confusingly similar to existing brands or trademarks.

Promoting your brand

Finally, remember to promote your brand in all your material: advertising, stationery, flyers, and website. It is part of being consistent in all your marketing.

Further information on biz.org.nz.

 

 

 

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