What’s your company’s breakeven point?

The figures on an income statement report the sales, expenses, and net profit or loss of a business. But these figures can be helpful in another way. They can be used to compute the breakeven point for the business. Knowing your breakeven point can help you run your operations more efficiently and profitably.

Simply put, the breakeven point is the sales volume at which the business generates just enough revenue to cover its expenses. While a business that’s breaking even doesn’t have a profit, it’s not losing money either.

* How to determine breakeven. To calculate your breakeven point, you’ll need to know three things: sales, variable costs, and your total fixed costs. Variable costs are those that fluctuate with the number of items sold, such as the cost of materials and sales commissions. Within limits, fixed costs do not fluctuate with sales volume (i.e., rent, insurance, and property taxes).

* Calculating the breakeven point involves two steps. First, it’s necessary to figure out the amount left over from each sales dollar after the variable expenses have been subtracted. This is known as the contribution margin. Then the contribution margin is divided into your fixed expenses to get the breakeven point.

* How to use breakeven. How can you benefit from knowing your breakeven point? First, you’ll be able to manage your business better once you know the sales volume needed to turn a profit. Second, by monitoring your sales, you can accurately predict whether you’re on course to reach your profit goals. Third, you’ll be able to take corrective action more quickly.

There are other benefits too. Using breakeven analysis, you can calculate the sales volume you’ll need to cover the costs of a proposed new product or service. Plus, if you have a desired profit, you can add it to your fixed expenses and calculate the precise sales volume you need to achieve that targeted profit.

Call us if you would like assistance in using breakeven analysis to improve your business.

David Bradsher, CPA

What’s more important – saving for children’s college or your retirement?

A college education. Retirement. What do these major life events have in common?
One shared characteristic is that each comes with a price tag. Here’s another: If you have school-age kids, you might be facing the challenge of having to decide which goal to save for. They’re both important. So how do you make the choice?

Here are some suggestions that can help you reach a sensible solution.

* Eliminate excuses for not making a decision. Procrastination can be costly. For example, to accumulate $100,000 in five years, you’d have to deposit a little over $1,500 every month in an account that earns 4%. But with a ten-year time horizon, assuming the same return, you can build up $100,000 by socking away less than half that amount, or approximately $700 per month.

What you need to know: Estimate the total amount required for both goals, how much time you have, and how much cash you’ll need to set aside on a regular basis.

* Expand your resource horizon. Once you’ve computed the expense side of the equation, figure out how much you can afford to save. You may find that, with one pool of income and two goals, there’s not enough money to fully fund both goals.

But who says you have to pay for everything yourself? Turn an obstacle into an opportunity by searching out alternatives. For instance, while your income in retirement may be dependent in large part on your savings, there are plenty of options for paying
college tuition.

Where to look: Investigate the possibility of advanced placement credits while your child is still in high school. Other potential sources of help include scholarship prospects, federal work/study programs, and summer internships.

* Adopt a flexible approach. Broadly speaking, you have three alternatives for divvying up your available savings between the two goals. You can save for retirement only, save for college only, or opt to do both.

Yet within each alternative are creative strategies. As an illustration, you could start out by saving strictly for retirement, shift toward saving for college when your child reaches a certain age, then switch back after graduation.

Caution: Be careful of falling into the deadline trap. It’s likely your kids will attend college before you retire. Since the tuition deadline is closer, you might be tempted to reduce or eliminate retirement plan contributions in the early years of your savings plan in order to focus on education savings.

But consider this: A typical retirement will generally last longer and cost more than your child’s education. By putting college tuition first, you could end up with less than you need in your retirement nest egg. Instead, take your overall time horizon into account.

For assistance with the numbers, give us a call.

David Bradsher, CPA

Should a freshman in college have a credit card?

Should you send your child off to college with a credit card? Opinions are divided, both among parents and financial advisors. It’s a situation that can work out really well or really badly, depending on the student and the parents.

At its best, everyone benefits from giving a student a card. The student uses the card for budgeted expenses, pays off the balance each month, and starts building a good credit history. The parents sleep better knowing the student has a credit source in case of emergencies.

At its worst, the student is unused to managing money or living within a budget. The student fails to make payments on time, incurs high interest charges, and ruins his or her credit history. The parents have to step in to bail the student out.

Among the risks:

* Lack of experience in managing money can lead a student to overspend or to neglect making payments on time.

* Peer pressure may encourage a student to spend on entertainment or clothes, just to keep up with friends.

* Failure to agree on a budget beforehand can result in shock when you see your student’s monthly statement.

* Parents co-signing for the card can put their credit scores at risk, too.

* Loss or theft of the card can lead to problems that take time to resolve.

To minimize risks:
* Set ground rules for use of the card. Agree on what it may and may not be used for. Put the agreement in writing and have the student sign off.

* Establish a budget. Talk regularly about how your student is managing his or her expenses within the budget.

* Consider alternatives to a credit card, at least for the freshman year. Consider using a prepaid credit card, or set up a checking account with a debit card. That allows the student to gain experience managing expenses within a budget.

Finally, remember you may have no say in the matter. Students are bombarded with credit card offers as soon as they enroll. Card companies are usually happy to issue a card to any student over age 18 in his or her own name.

David Bradsher, CPA

Know the facts about IPOs – Facebook anyone?

Do you know anybody who’s tripled his money investing in the IPO (initial public offering) of a hotshot new company? It can happen. And many investors thought the recent Facebook IPO was a way to quick riches.

Yet the truth is, most investors don’t make money playing IPOs. It’s just that no one brags when they lose money. Nonetheless, investors of all kinds are lined up for a shot at the next IPO. So it pays to know the facts before diving in.

First bit of advice: Don’t bet the farm. The problem is that generally IPOs are issued by companies with no track record, inexperienced management, and few assets. And, unfortunately, the underwriters for these IPOs are motivated to complete the transaction, collect their fees, and move on. Their compensation is linked not to the quality of the firms they take public, but rather to the number of deals they sell to the public.

To protect yourself, you must do your homework, as you would for any investment. A company planning an IPO writes a prospectus that describes the business and details management’s plans for what they intend to do with the money, how fast they intend the company to grow, and what profits they expect. The prospectus also discusses the competition and markets, and, most importantly, describes the risks of investing in the IPO.

Do the necessary research, and be sure you understand the risks before you make an investment in an IPO.

David Bradsher, CPA

Combine business and pleasure

Check the tax savings of combining business and pleasure on the same trip this summer. Within the U.S., if the primary purpose of the trip is business and you add on a side trip or an extra few days for pleasure, you can deduct all the travel costs to and from your business destination and all other business-related costs. You can’t deduct costs related to the pleasure portion.

David Bradsher, CPA