Across the entire business over the whole range of

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Unformatted text preview: rs, such as service businesses, have few long-term assets. ADDITIONAL COMMON RATIOS These additional ratios are also quite common. • Assets to Sales: assets divided by sales. • Debt/Assets: total liabilities divided by total assets. • Current Debt/Total Assets: divides short-term (current) liabilities by total assets. • Acid Test: short-term assets (minus accounts receivable and inventory), divided by short-term liabilities. • Asset Turnover: a repetition of the same ratio in activity ratios above (Total Assets Turnover). • Sales/Net Worth: total sales divided by net worth. • Dividend Payout: dividends divided by net profit. HURDLE: THE BOOK 17.6 ON BUSINESS PLANNING Break-even Analysis You prepared a preliminary break-even analysis in Chapter 3: Initial Assessment. Now it’s time to go back to that and review the numbers. The next illustration shows (again) the standard break-even analysis included in a standard business plan. BREAK-EVEN ASSUMPTIONS This section of the model calculates technical break-even points, based on the assumptions for unit prices, variable costs, and fixed costs. This is a monthly break-even analysis. It assumes monthly fixed costs, and per-unit sales price and variable costs. It uses the standard break-even formulas detailed below, but suggests some modified assumptions. Where standard fixed costs are supposed to be costs that would be sustained even if the business stopped, we suggest you use operating expenses instead. I suggest this change in standard financial analysis because you are better off knowing break-even points on real operations, rather than on some theoretical calculation of fixed expenses. The units break-even point is: Fixed Cost ÷ Unit Price - Unit Variable Costs The sales break-even point is: Fixed Cost ÷ (1-(Unit variable Costs/Unit Price)) The Break-even Chart The break-even analysis depends on assumptions for fixed costs, unit price, and unit variable costs. These are rarely exact assumptions. This is not...
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