Mark has now carried out some research into his proposed new restaurant and he has produced the following information:
What is a Break Even
Total variable and fixed costs are compared with sales revenue in order to determine the quantity of sales level, sales cost or production at which the business makes neither a profit nor a loss, which is the break-even point.
How to calculate break even points
The Break even point is the point at which total revenue and total cost (variable and fixed cost added together) meet or are equal. The break even analysis can also tell you at what point you are making a loss or a profit.
There is two ways which you can calculate the break even point. The first is by a formula and the second is by graph.
The first way you calculate break even is by this formula:
Break-Even=
Fixed Cost
(Selling price per unit – Variable Cost per unit)
(Contribution)
Selling price is the price Mark puts on the food that his selling.
Variable cost is the cost that does change regarding to output, an example of a variable cost is raw materials ( food stock) because if you sell a lot then the more raw materials you would need that would increase the price of purchase while if you don't sell then you would need to minimise your purchasing.
Fixed cost is the cost that does not change regarding the output e.g. Rent. Revenue is the money a business receives from sale of its products and services.
Establishing the break even helps the company to plan the levels of production that it needs to be profitable.
Break Even of Mark’s Restaurant
This is the formula and the figures for Marks break even
Fixed cost £11,000 = 440
Selling Price £70 - Variable cost £45
This means that at 440 customers mark will have made enough revenue to cover his total cost.
This is the website that I got the graph from and information.
http://tutor2u.net/business/production/break_even.htm
In the diagram above, the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.
A break even chart is where sales revenue, variable costs, and fixed costs are plotted on the vertical axis while volume is plotted on the horizontal axis.
Cashflow
FOOTY FANATICS Ltd
Dave Ferguson is the manager of Footy Fanatics Ltd. The business makes and sells footballs for local school football teams.
Dave is compiling his cash flow forecast for the next 6 months and is not expecting any surprises. Sales are good, although as usual they are better in the winter than during the summer.
Sales for: January £16,000 Materials for: January £9,000 February £15,000 February £7,000
March £15,000 March £7,000
April £14,500 April £6,000 May £13,000 May £5,000
June £12,000 June £5,000
Additional Information
Wages / Salaries £5,000
Rent £500
Rates £100
Electricity £200
Repairs £300
Stationary £20
Telephone £150
Advertising in April £1,000 other months £200
Insurance £500
New Machine £5,000 in Jan
Cash flow is essentially the movement of money into and out of your business; it's the cycle of cash inflows and cash outflows that determine your business' solvency.
Cash flow analysis is the study of the cycle of your business' cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.
Cash flow analysis involves examining the components of your business that affect cash flow, such as accounts receivable, inventory, accounts payable, and credit terms. By performing a cash flow analysis on these separate components, you'll be able to more easily identify cash flow problems and find ways to improve your cash flow.
A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month.
Cash flow Forecast
Using the information given to me I am going to create a cash flow forecast.
The table below shows the figure that occurs when Dave hasn’t added new machinery into the Cash flow forecast.
An overdraft allows you to borrow an agreed amount of money on top of your bank balance. An overdraft is different to a bank loan because with a bank loan Dave would have to apply to the banks each time he wants to have a new loan.
I think that Dave should have an overdraft facility because if he runs out of money the payments coming out of his account may fail and he may be charged by the bank. With an overdraft he could still make payments from his accounts and this would prevent him from incurring a bank charge.
It is a good facility to have because it is quick and easy to set up and once it has been set up it is a constant feature of the account. He also has to arrange a set time scale with the bank to repay the loan. With an overdraft there is no set time scale to repay the bank.
This table shows the difference in figure when new machinery is added
From the cash flow chart Dave would require an overdraft facility in the month of January because its closing balance for this month is -£2,970. This negative figure may be due to the fact that Dave has had to get new machinery (£5,000) at the start of the month. This has therefore meant that his expenses for this month have far out weighed his income.
Dave would also need an overdraft facility the following month of Feb., March, and April. In February and March, Dave has had a favourable net cash flow figure. This has been greater than his expenditure however Dave closing balance is still negative because has not made enough profit to make his closing balance positive and hence still needs an overdraft facility.
In the month of April, Dave has to pay an extra £800 on advertisement; this can be put down as the main reason why his net cash figure has decreased compared to Feb and March. However on the month of May Dave’s finances improve and he is able to put his closing balance into a favourable figure and no long reliant on his overdraft facility.
Dave’s cash flow does not go according to plan and the following changes have to be made:
-
On the 1st February Dave’s landlord has increased the cost of rent to £800.
- The cost of materials in May was £8,000 and the cost of materials in June was £4,000.
- The sales in January are £18,000.
From the cash flow chart we can see that the increase of cost has caused the subtotal of expenditure to increase because £800 that was added to rent in February. The cost of materials which was £8,000 in may and in June £4,000 has increased the total expenditure which means that Dave's closing balance is negative.
Recording financial transaction
At some point in a businesses life time it goes through a number of different transactions, at each stage of the transaction process documents are used to act as a record of transaction.
Transaction process
Below is a table showing the process that a business like Jenny food restaurant would use to record transactions.
The businesses documents stated above are not the only way of recording transactions. Some businesses like a coffee shop or corner shops mainly receive transaction through cash, but others such as a hotel receive mainly debit or credit card payments. There two ways of recording transation either by manually or electronically.
Manually day books are simple ways of recording financial transaction through day to day bases. They are used by businesses to summarise transactions before they are transferred to the main account.
The most common types of day books used are:
- Sales day book- The Chicken cottage organisation records all sales made to date from invoices issued by the business.
- Sales return day book- This records any goods returned from customers, again by date.
- Purchase day books- This records all purchases that has been made by date and matches invoice for raw materials or stock received by business.
- Purchase return day book- It records any goods that has been returned to a supplier because of in case of faults. This matches any credit note received by the business.
Accounts
Accounts used by businesses summaries financial information in different categories such as sales by customer, purchases made by supplier, payments by a type of expense and as well as cash in the bank and any cash on the premises. There are several reasons for doing this.
Financial information is recorded against a particular category because it is easier to obtain precise summary for instance how much has been spent on stock level or advertising for the year.
Accounts information can be summarized to provide managers with instant information about actual cash flow, potential profit (or loss) debts outstanding, stock level etc, which gives them the opportunity to take action when needed.
Pretty cash
The petty cash account is used to record small items of expenditure. It is links to the main cash account which records the money that is kept in the bank, rather than withdrawing money from the bank every time a small purchase is required, an amount is issued to the petty cashier who is responsible for keeping the cash safe in lockable cash boxes.
The money is used to but small items such as when cash is needed to pay for them for example:
- Buying stamps for emergency mail when the mailrooms are closed
- Paying the window cleaner
- Paying taxes that take visitors to the air port or the train station.
Petty cash is also used to repay staff that pays for business items out of their own pocket. The member of staff must obtain a receipt as proof of purchase and then complete a petty cash voucher. The cashier will authorize the voucher, then pay back the amount and record the transaction in the petty cash account.
Cash registers
Cash register is mainly used in small shops e.g. Chicken cottage when the sales assistant will read the price attached to the product, and this will be recorded into the cash register. At the press of a button the cash drawer is opened by the machine to take money in from the customer and to take out money, at the same time the cash register records the money spent and it issues a receipt.
The more advanced cash registers are called POS which stands for point for sales. These cash registers use bar code scanners and PC-link cash registers that are linked with credit and debit card payments.
Electronic point of sale
Rather than link a POS system to a computer, large stores prefer to use EPOS systems where all their cash register is linked to a main or central computer. This allows some of the following functions to perform:
- Bar code readers can identify each product and its price, the total spend is calculated by the computer.
- Stock record can be updated as soon as product is sold. This also allows low or high turnover stock to be identified.
- Detailed receipts can be printed which provide the details or the good their bayed together with their price, this also includes the VAT, add card details and promotional messages.
- Some large stores/supermarkets use the data to draw up profiles of regular customers so that they can mail them with information on promotions of their favorite products.
Fraud
Fraud is when someone attempts to gain an advantage by deception, for instance someone who exaggerates their qualification for a job.
This table shows the different types of frauds that exist and the preventions that are taking.
I visited a small local business near my area. The restaurant is chicken cottage and it serves a variety of chicken dishes e.g. chicken burgers, chicken nuggets, chicken breast and leg. They also sell drinks and crisp. They record transactions through cash register and sales day book.
Evaluation
In this unit I have learnt how to produce a break even chart. I know how to make a casflow forecast and learnt the importantness of it. I now know the cost, revenue and profit involved in owning a restaurant and the similaraties it has with other business sectors. I have had diffuclty researching the different cost involved in finance businesses and producing a cashflow forecast. The thing that I would improve for this assigment is to have done more research and improve on my presentation.
Bibliography
Information from BTEC business 2nd edition textbook
Notes from exercise book
Work sheets from Mr lewis
Appendix
This is my research that I have done for Marks Restaurant.