Quick Printing

DEC 2013

Quick Printing is the only business resource serving the quick and small commercial printing niche in North America. Quick Printing is the authoritative source for business information, emerging technologies, shop profiles and management insight.

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MONEY TALK Break Even Analysis: A Metric for Everyday Use How to determine break even for your company, and what it means. By Stuart Margolis reak even analysis is a fundamental and important criterion for management to use in formulating overall business strategies for selling printed product, establishing work shift production benchmarks, and evaluating success in various other areas of the company. B Performing break even analysis can help to: • Determine price levels • Analyze sales needs and goals • Estimate whether or not an expansion project or cost-saving project makes sense, and more The goal of a break even analysis is to determine when sales and revenue equal total expenses. Beneath the surface, the real value of this analysis lies in helping managers break down the components of the equation to determine the relationship between revenue, fixed costs, and variable costs. In essence, management should use it to determine answers to questions like: • Has our press purchase paid off? • Are we covering costs at our current pricing levels? • Did our company break even on that big job requiring so many outside services? • How much printing needs to be sold and produced so all of our expenses are covered? Changing one component of the break even analysis changes the results and allows managers to explore various potential scenarios to make better decisions and forecasts. Pricing Decision Break Even Analysis Scenario: Here's a snapshot of a company Fixed Expenses (or exp. that act fixed) $/Month Payroll and payroll taxes -$300,000 Benefits $ 15,000 Rent $ 35,000 Depreciation $ 25,000 Utilities $ 14,000 Factory expenses (insurance, maintenance) $ 91,000 Administrative (office, professional fees, etc.) $ 15,000 Selling expenses (travel, auto, entertainment) $ 30,000 Interest expense -$ 10,000 Total overhead or fixed expenses $535,000 38 QUICK PRINTING / December 2013 The variable costs for the month based on $910,000 in sales look like this: Variable Cost $/Month Paper $185,000 Ink $19,000 Plates $15,000 Other $11,000 Outside services $96,000 Factory supplies $27,000 Sales commissions $52,000 Total variable cost $405,000 Sales for the month were $910,000. Fixed expenses (overhead) were $535,000. Variable expenses were $405,000. Did we break even? In this scenario, break even looks like this: Sales = Fixed Costs + Variable Costs or $940,000 = $535,000 + $405,000. $910,000 is less than $940,000, so according to our figures, with sales of $910,000, the company lost $30,000 this month. Cost Analysis: Evaluate the Components of the Equation To find out what went wrong, we need to take a careful look at the equation, break it down, taking a careful look at costs and pricing. For this example, let's assume fixed costs, or overhead, are tight and controlled. To perform an analysis of costs we turn to the PIA Ratios. Upon research we find that our company's variable costs as a percent of sales are high compared to industry profit leaders in the Ratios. Here are the facts: Variable Cost $/Month % of Sales % of Sales for Profit Leaders Paper $185,000 20.3% 20.9% Ink $19,000 2.1% 1.9% Plates $15,000 1.6% 1.4% Other $11,000 1.2% 3.1% Outside Services $96,000 10.5% 8.5% Factory Supplies $27,000 3.0% 1.8% Sales Commissions $52,000 5.7% 4.1% Totals $405,000 44.5% 41.7% While taking a closer look at the components of break even, we determine that our variable costs seem to be about three percent higher than the variable costs of profit leaders. If we can control those costs, will we break even? Three percent seems like a small amount, but as a percent of sales it adds up. To bring variable sales down to 41 percent of sales, here's the equation: 41% of $910,000 ($910,000 x 0.41 = $373,000). This means variable costs need to be reduced by $32,000. Suddenly, that three percent is a lot. Can we shave $20,000 off outside services by doing more work inside and not sending it out? Can we reduce factory expenses by $10,000 by focusing on better purchasing and tighter usage? (continued on page 40) w w w. M y P R I N T R e s o u r c e . c o m

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