Analysis of Hema Business Breakeven Presentation - Case Study Example

Analysis of Hema business Breakeven presentation Name Institution Introduction Before a person ventures into any form of business enterprise, he or she needs to conduct a conclusive feasibility study that has a perfect aim of determining whether the proposed business enterprise is marked for success or for failure (Clinton 2013, p. 8). In many cases, most people engage themselves in business enterprises without having conducted this study. This has been proven to be the top-most cause of failure in many businesses. Before one decides to launch a certain service or product, he or she must be able to analyze all the dynamic factors revolving around this business form. He or she should be able to determine the possible costs involved in the business, the amount of capital resources that the business requires, where to get these resources and an exit strategy in case the business does not pick up as expected. Service-based form of businesses form a good pedagogical example of business enterprises which are conducted by mind, not through a critical evaluation (Li et al 2008, p. 4). In other words, most professionals in various fields get into business for the love of their service. They do not take time to evaluate the possible financial consequences these moves might have on them and their business endeavours. In view of the above, this paper seeks to investigate the applicability of business planning and strategizing using a practical case of Hema. The paper will look into various parameters of Hema business including both costs as well as revenue streams. It will be determined here whether Hema is destined to make profits or not. The breakeven points will also be determined and necessary advice given to her as a way of enabling her to increase her profitability quotient. Background information Hema is a recent graduate of Complimentary therapy. Having been involved in small-time business through offering her services to her relatives and friends, she believes that it is time to take the service to a commercial level. She plans to hire an office for herself and conduct the CT business from there at a cost of 17.60 pounds per session for a 45 minutes session. The following analysis shows the viability and applicability of this plan through matching the revenue she expects to achieve with the costs involved in bringing the revenue to book. Net profit analysis for Hema Following the analysis of the cost-revenue for the business, Hema cannot be able to make any form of business profit as the business stands now in the first year. This is because her costs exceed the revenues that she receives from the business by far. The following calculations offer the rationale behind this and determines the total amount of money that she can make as profit for the year. Revenue stream for Hema Total time taken to conduct one therapy session = 45 min + 15 report writing + 15 min break between sessions = 75 minutes In a week, she works 5 and a half days, eight hours a day. Hence, this means that she works 8*5.5= 44 hours per week. When this is translated into minutes worked per week, they come to 44*60= 2640 minutes per week. To get the number of sessions per week we divide the total number of minutes take per week by the average number of minutes one session takes. This gives us 2640/75= 35.2 sessions. Each session is charged 17.60. Hence, the total amount of money earned from all the sessions in the week becomes 17.60*35.2= 619.52 To get the total amount earned during the year we multiply by the number of weeks in the year by the amount earned per week. This gives us 619.52* 52 = 32215.04 From this figure, we need to deduct the number of days spent without earning (holidays). They are 8 in total. We get the number of minutes spent working per day on a normal day = 8*60= 480 minutes. We then get the number of minutes spent not working while on holiday = 8*480=3840 minutes. From there we can get the number of sessions that are missed during these days = 3840/75 = 51.2. The revenue foregone in this case then becomes 51.2*17.60= 901.12 To get the total amount of revenue realized per annum we subtract this figure from 32215.04 = 32215.04-901.12= 31313.92 The total amount of revenue that Hema can earn per annum working 8 hours per day for 5 and a half days per week at the current rate of 17.60 becomes 31, 313.92. Cost analysis Rent 6000 Shared costs 4800 Other costs 15380 Salary expense 24,000 Projected additional costs 415 Total costs (projected and incurred) = 50,595 Net profit for Hema: Net profit is attained by the difference between the revenue of a business and the costs involved in creation of these revenues. If the revenue figure is higher than the cost figure, then the business can be said to be making a profit. If the revenue figure is lower than the cost figure, then the business is making losses. The net profit figure for Hema is achieved as follows; Revenue- Cost = 31,313- 50,595 = (-19,281.08) This figure is in negative balance which implies that Hema will make a loss following these projections. Breakeven point for Hema The breakeven point is the point where the costs are equivalent to the revenues attained by the business (Dimitriades 2007, p.12). In some cases, it shows the value in form of units that are supposed to be produced so that the cost figure can be rationalized to zero. In this case, the breakeven point will be determined by the number of sessions that Hema needs to conduct so that she can meet her costs. The following analysis offers more insight into the same. Total costs of conducting the business per year = 50,595 Cost Hema charges per session = 17.60 To break even, Hema needs to conduct 50, 595/17.60 = 2875 (rounded off) sessions against the current 1830 sessions. The additional 2875-1830 = 1045 sessions will provide to cushion her against any losses. At this point, she has reached her breakeven point. If she want to make profit from this point she either increases the number of sessions she offers per annum or increases the amount in fees charged to her clients. For instance, if she decides to increase the fees to say 20 per session and still retain 2875 sessions, she would be having a revenue of 2875*20= 57,500. This would portray a net profit of 6905 in this case. Impact of taking 3 weeks paid holiday If Hema decides to take a 3 weeks paid holiday at the current plan, this has a very huge detrimental impact on her business. As the business stands now, it requires an infusion of capital and cash flow. If she takes a paid holiday, the cash flow to the business becomes negative. The following analysis portrays the full effect of this action. The current plan shows that the business has a deficit of 19, 281.08. Three weeks holiday impact mathematically: Revenue lost as opportunity cost: No. Of hours in three weeks = 5.5 * 3 = 16.5 hours Minutes in 16.5 hours = 16.5 * 60 = 990 Number of sessions forfeited = 990/75 = 13.2 Amount of money lost in 13.2 sessions not taken = 13.2 * 17.6 = 232.32 This amount ends up inflating the net loss figure. The new figure becomes 19,281.08 + 232.32 = 19,513.40. Adjustment Hema is evaluating bringing in another practitioner at a salary level of 20,000. Both are expected to work at 80% capacity. The charges of the sessions remain the same. However, she is to be issued with another room at a discounted rate. Her analysis is as follows. Revenue: 1 Practitioner working at 100% capacity does 1830.4 sessions per annum. 1 practitioner working at 80% capacity will do 1464.32 sessions per annum Each practitioner takes three weeks paid leave, equivalent to an opportunity cost of 13.2 sessions per practitioner. Number of sessions each practitioner then conducts per annum = 1464.32- 13.2 = 1451.12 Amount in revenue received from one practitioner includes 1451.12* 17.60 = 25,539.71 Amount in revenue from both becomes 25, 539.71 * 2= 51,079. 42 Costs: Normal costs = 50,595 Additional costs: Second practitioner’s salary = 20000 Rent for second room = (75/100)* 6000 = 4500 Total costs (New) = 75095 a. New net profit Revenue – cost = 51,079-75,095= (24,016) b. New breakeven point The new breakeven point in this case will show the consolidated amount in sessions that the two practitioners will have to put to realize a zero gain/loss. This is calculated in the following sentences. New breakeven point = 75095/17.60= 4266.76 sessions. 4266.76/2 = 2133.38. This implies that each of the two practitioners will have to bill 2133.38 sessions to attain breakeven point in this case. Advice to Hema In order to increase her level of profitability, Hema should consider adopting a number of approaches. These approaches have been discussed in the following paragraphs. Reduce expenses One of the best ways of increasing the amount of revenue in any business is through ensuring that the expenses are kept to an absolute minimum (Ghobadian & O'Regan 2011, p. 426). Expenses eat into the revenue levels that a business is supposed to be earning. In Hema’s case, there are a lot of expenses that are eating into the profits that she is supposed to earn. These expenses are making her business record a projected negative balance in the net profit levels. It would be vital for Hema to identify the activities and other forms of expenses that are eating into her business. For instance, she could somehow try to establish herself in a location which does not charge her such exorbitant amounts. Bearing in mind that she will be in the process of establishing herself, it is important that she looks for a cheaper place that would not make her dig too much into her pockets just for upkeep. After she has successfully managed to get herself a list of clientele and she becomes assured of her earnings, she can then go ahead and establish herself at the more expensive but serene location. If she moves to this location now, she might take longer to break even because clients might take time to appreciate her services. They may be sceptical about the services she offers until she has established herself as a competitive practitioner. Avoid fast expansion strategies Instead of Hema going out to acquire another practitioner so that they can expand the business, it would be better if she first concentrates on the expansion of the business by herself. When she becomes confident that she cannot be able to handle the flow of work coming to her, this is the only time she should consider hiring another practitioner to assist her with running of the business. Expansion in itself presents a number of management strategies. These might prevent Hema from dedicating enough of her time towards her occupation, a thing which might lead to loss of revenue. Reduce holidays during the first year The idea of Hema taking time off during her first year in business to go for a holiday is not a very good move for the business. The fact that the holiday is a paid one makes it even worse for the business. Though it is important for business people to find time to unwind, this should not be at the expense of the business. When a business is in its formative stages, it requires a lot of care and attention if the incubation is to work (Bryson 1998, p. 74). Hema should allow herself at least three years before she can take time off to go for a paid holiday. By this time the business will have stabilized enough to allow her leave without incurring much damages in terms of revenue loss in the business. Currently, Hema is the cornerstone of the business. If she moves out, there would be no earnings in this business. The analysis conducted in this paper show that she would be earning a negative profit. To cushion herself against this, she should not take a paid holiday. A holiday is an expense that the business cannot be able to afford as it is now. Consider a slight increment of fees charged From the analysis conducted in the second section of this paper, a slight increase in the level of the fees brings about quite a considerable change in the levels of net profits that the business gets. For instance, if she increases her prices by two pounds, this might not seem much to the clients. However, the impact in the business in the long- run is quite huge. If she also applies other measures as discussed in the above paragraphs, she might find herself breaking even within a few months’ time. Consider increasing the number of hours Hema should also consider increasing the number of hours that she spends at her office. This could be done through either two ways. One of the ways would be reducing the session times to 30 or 40 minutes, reducing the amount of time spent between sessions to five minutes and reducing the time taken to write a report to ten minutes. Then she can consider extending her working hours from 8 to 10 for six days per week for the first year. This could have a very significant impact on her revenue levels as the following analysis shows. Amount of time spent in one session reduces to 30+10+5= 45 min. Number of minutes per day = 9* 60= 360 Number of sessions daily = 360/45= 8. Sessions per year = 8* 365= 2920. This translates into an increment of 2920-1830= 1090 sessions. The revenue increment from this would be 1090*17.60 = 19184. Without even applying other means as discussed above, Hema would only be a couple hundred pounds to breakeven point. Suppose she applied all the factors recommended in this case. Her new rent would be a 25% of the original= 4500. Shared costs can also be averaged to have reduced by 25% to 3600. Other costs remain static. The new revenue frames would be: 2920 sessions * new price of 19 pounds = 55480 Cost = 4500+ 3600+15380+415= 23895. New profit scale = 55480- 23895 = 31585. This is a positive figure implying a profitability quotient. Conclusion The paper above has offered an indepth analysis of Hema business and Hema’s efforts in trying to establist the CT business. As it has been observed, currently Hema is not making any positive profits. Her actions only lead the business into more and more debts. The loopholes identified here include paid holidays, unplanned expansions, unwarranted expenses among others. The paper has offered recommendations upon how Hema can be able to revamp her business bring it back onto the path of profitability. The identified strategies include increasing the number of working hours, considering a slight increment of fees charged, reduce holidays during the first year, avoid fast expansion strategies and reduction of expenses. When this is done, the business is designed to start attaining positive profitability figures and the breakeven point reached faster. References Clinton, M 2013, ‘Investors making quick profit flipping ParkerVision stock’, Jacksonville business journal, pp. 1-9. Dimitriades, ZS 2007, ‘Business Ethics and Corporate Social Responsibility in the e-Economy: A Commentary’, Electronic journal of business ethics and organizational studies, vol.12, no.2, pp. 11-12. Li, Y, Guohui, S, Eppler, MJ 2008, ‘Making Strategy Work: A Literature Review on the Factors influencing Strategy Implementation’, ICA Working Paper 2/2008, Retrieved from http://www.knowledge-communication.org/pdf/making-strategy-work.pdf Ghobadian, A & O'Regan, N 2011, ‘Successful strategy making in Bupa not-for-profit provident: A case study and interview with Mr Ray King, chief executive of Bupa’, Journal of Strategy and Management, Vol. 4, no. 4, pp.422 – 431. Bryson, JM 1998, ‘A strategic planning process for public and non-profit organizations’, Long range planning journal, Vol. 21, no. 1, pp. 73-81. Read More