IMGCAP(1)]One of the best tools to evaluate a business and get a quick handle on the knowledge of the owner or manager is the break-even analysis.
Break-even analysis is a simple calculation that tells how much sales are needed to break-even, and how much will be lost or earned when sales fall short of that amount or exceed it. A key part of this is to determine the “product lines” a business has and its direct cost structure.
A simple explanation is to imagine a bar and restaurant. There are two basic product lines—liquor and food. Generally the direct costs for the bar are around 20 percent and the food around 35% percent. If bar sales are 40 percent of the total and food 60 percent, we can then get a weighted average of sales. This information can be applied to almost any business.
Now, how I get this information is very insightful to me. I get it over lunch with my client—primarily new clients—and write it on a napkin. I believe most owners or managers should understand and have a handle on the product lines and the approximate direct costs. Most do, but some do not.
I am appalled when clients do not have a clue about this information. This tells me a lot about them and how the business is being managed—it isn’t. I then draw up a proposal to provide a methodology for helping them get a better grasp and establish controls.
For those that know, I test what they told me and then complete the B/E analysis for them. It then becomes one of their management tools.
The more knowledgeable the client, the better it is to work with them.
Edward Mendlowitz, CPA, is a partner in