Urban Innovation21 Small Business Grant Competition
Financial Summary Guide
To complete your financial summary you will need the following:
Start-up costs or Grant Budget , are everything that you need to start your business or expenses related to
your grant request, including deposits, equipment, inventory supplies, workers compensation insurance, etc.
Get real numbers for these figures by asking for qoutes or costing out items you need. List them and add them
up.
Fixed Costs. You will also need to separate your business expenses (the business bills) into; Fixed Costs,
these are costs that don’t change and will remain the same regardless of your sales. For example, you may
rent a location and you will always have to pay the rent even if you don’t sell a thing.
Variable Expenses, are costs that change according to your sales for example inventory or materials, the
more you sell the more inventory or materials you may need, if you have a service or labor intensive business
you may need more staff to meet customer demand. You need to calculate what your monthly variable costs
are.
Revenue Current, list the sources of capital, they can include grant capital, loans and existing sales contracts.
These sources of capital are added up and all expenses are subtracted to determine if there is a profit or a
loss. It is quite possible that in the first year you may experience a loss. If there is a loss please explain it in the
Capitlization and Finance section and suggest a timeframe when your business will show a profit.
The Break Even Analysis. You will need to complete a break even analysis for your business. The example
below illustrates how a break even analysis is completed.
A person starting a new business often asks, "At what level of sales will my company make a profit?"
Established companies that have suffered through some rough years might have a similar question. Others
ask, "At what point will I be able to draw a fair salary from my company?" Our discussion of break-even point
and break-even analysis will provide a thought process that may help to answer those questions and to provide
some insight as to how profits change as sales increase or decrease.
At the heart of break-even point or break-even analysis is the relationship between expenses and revenues. It
is critical to know how expenses will change with sales. Some expenses will increase as sales increase,
whereas some expenses are fixed.
Variable Expenses
Variable expenses increase when sales increase. They also decrease when sales decrease. For example, at
Oil Change Co. the following items have been identified as variable expenses. Next to each item is the variable
expense per car or per oil change:
Motor oil
$ 5.00
Oil filter
3.00
Grease, washer fluid
0.50
Supplies
0.20
Disposal service
0.30
Total variable expenses per
car
$ 9.00
The other expenses at Oil Change Co. (rent, heat, etc.) will not increase when an additional car is serviced.
For the reasons shown in the above list, Oil Change Co.'s variable expenses will be $9 if it services one car,
$18 if it services two cars, $90 if it services 10 cars, $900 if it services 100 cars, etc.
Fixed Expenses
Fixed expenses do not change with sales. In other words, fixed expenses such as rent will not change when
sales increase or decrease. For example, at Oil Change Co. the following items have been identified as fixed
expenses. The amount shown is the fixed expense per week:
Labor including payroll taxes and benefits
$1,200
Rent and utilities for the building it uses
700
Depreciation, office and professional, training,
other
500
Total fixed expenses per week
$2,400
Mixed Expenses
Some expenses are part variable and part fixed. These are often referred to as mixed or semi-variable
expenses. An example would be a salesperson's compensation that is composed of a salary portion (fixed
expense) and a commission portion (variable expense). Mixed expenses could be split into two parts. The
variable portion can be listed with other variable expenses and the fixed portion can be included with the other
fixed expenses.
Revenues
Revenues (or sales) at Oil Change Co. are the amounts earned from servicing cars. Oil Change Co. charges
one flat fee of $24 for performing the oil change service. For $24 the company changes the oil and filter, adds
needed fluids, adds air to the tires, and inspects engine belts. At the present time no other service is provided
and the $24 fee is the same for all automobiles regardless of engine size. As the result of its pricing, if Oil
Change Co. services 10 cars its revenues (or sales) are $240. If it services 100 cars, its revenues will be
$2,400
An important term used with break-even point or break-even analysis is contribution margin. In equation
format it is defined as follows:
Contribution Margin = Revenues – Variable Expenses
The contribution margin for one unit of product or one unit of service is defined as:
Contribution Margin per Unit = Revenues per Unit – Variable Expenses per Unit
At Oil Change Co. the contribution margin per car (or per oil change) is computed as follows:
Contribution Margin per car =
Revenues per car
–
Variable Expenses per car
Contribution Margin per car =
$24
–
$9
Contribution Margin per car = $15
The contribution margin per car lets you know that after the variable expenses are covered, each car serviced
will provide or contribute $15 toward the Oil Change Co.'s fixed expenses of $2,400 per week. After the $2,400
of weekly fixed expenses has been covered the company's profit will increase by $15 per car serviced.
One can determine the break-even point in sales dollars (instead of units) by dividing the company's total fixed
expenses by the contribution margin ratio.
The contribution margin ratio is the contribution margin divided by sales (revenues)
The ratio can be calculated using company totals or per unit amounts. We will compute the contribution margin
ratio for the Oil Change Co. by using its per unit amounts:
Revenues or Sales per car
Variable Expenses per car
Contribution Margin per car
$24
– 9
$15
Contribution Margin Ratio =
Contribution Margin
÷
Revenues or
Sales
Contribution Margin Ratio =
$15
÷
$24
Contribution Margin Ratio = 62.5%
The break-even point in sales dollars for Oil Change Co. is:
Break-even Point in Sales $ = Total Fixed Expenses ÷ Contribution Margin Ratio
Break-even Point in Sales $ = $2,400 per week ÷ 62.5%
Break-even Point in Sales $ = $3,840 per week
The break-even point of $3,840 of sales per week can be verified by referring back to the break-even point in
units. Recall there were 160 units necessary to break-even. At $24 per unit the necessary sales in dollars
would be $3,840.
Let's assume a company needs to cover $2,400 of fixed expenses each week plus earn $1,200 of profit each
week. In essence the company needs to cover the equivalent of $3,600 of fixed expenses each week.
Presently the company has annual sales of $100,000 and its variable expenses amount to $37,500 per year.
These two facts result in a contribution margin ratio of 62.5%:
Sales
Variable Expenses
Contribution Margin
$100,000
– 37,500
$ 62,500
Contribution Margin Ratio =
Contribution Margin
÷
Sales
Contribution Margin Ratio =
$62,500
÷
$100,000
Contribution Margin Ratio = 62.5%
The amount of sales necessary to give the owner a profit of $1,200 per week is determined by this break-even
point formula:
Break-even Point in Sales $ per week = Fixed Expenses per week ÷ Contribution Margin Ratio
Break-even Point in Sales $ per week = $3,600 per week ÷ 62.5%
Break-even Point in Sales $ per week = $5,760 per week
To verify that this answer is reasonable, we prepared the following schedule:
Per
52 Weeks
Week
Sales
$ 5,760 $ 299,520
Variable Expenses (37.5%)
– 2,160 – 112,320
Contribution Margin
Fixed Expenses
Profit
3,600
187,200
– 2,400 – 124,800
$ 1,200 $ 62,400
As you can see, for the owner to have a profit of $1,200 per week or $62,400 per year, the company's annual
sales must triple. Presently the annual sales are $100,000 but the sales need to be $299,520 per year in order
for the annual profit to be $62,400.
Additional Resources:
A workshop on how to complete your financial summary will be held Wendsday Novemeber 7th at 6:30 PM at
1901 Centre Avenue, Pittsburgh PA 15219.
Visit our website for templates to complete your financial summary. http://urbaninnovation21.org/grants/
Inidividual assistance may be requested, however, it is available on a first come first served basis, due to a
limited amount of time before the business plan summary is due. To book your appointment please contact
[email protected] or [email protected]
Exceptions, a business developing a prototype and requesting funds for design is exempt from the financial
summary. If you are prototyping you must provide a budget of what the cost will be to complete your prototype.