Questions & Answers

Q: I am having a problem with determining which figures to use for a Break-Even Analysis in a non-profit organization. Fixed and Variable costs are not a problem. We need to figure out whether we should provide equipment services, or continue contracting the service out, and where the break-even point is. All of our costs are calculated on a per-patient-day basis. We bill only one amount to insurance or Medicare which is a per-patient-day figure. This covers all services, drugs, nursing, physicians, etc. Does anyone have any idea how to solve this problem?

A: Try calculating the break-even point for the service when you deliver it, to do this you will need to determine/apportion the component of your fee that relates to this service and apply the variable and fixed costs. If the contract fee is less than your breakeven then you should contract it out, if not do it in house. The Profit Contribution Breakdown https://bizpep.com/profitcontribution.html may be of interest as well as the Pricing and Breakeven Analysis https://bizpep.com/pricebreakevenanalysis.html .

Question and Answer Item 57 - Browse All Question and Answer Items

Q: My question is on the inputs page. The space for owner labor in my case is $35,000. The outside earnings box seems to ask for total outside earnings being given up without regard to the owner labor amount I plan on paying myself once cash flow allows (the 35k entered in cells C19 and C28). My outside earnings would only total about $60,000. When I enter 60k into cell c64, the valuation is a negative number. When I enter 25k in cell c64 (60k-35k) I get a positive value of the business. The cash flow projection allows me to pay myself partial salary the first year and full salary the second. So it seems to me that the 25k--which is all I'm giving up of outside pay is the number to enter as owner's external earning power (cell c64). Am I understanding it correctly? Thank you for your help. I'm helping a friend on his purchased model, but as a financial adviser, intend to purchase the commercial license on my very next business client.

A: The Owners External Earning Power (C54) is the amount of earnings given up when the owner commits to the business. If you could earn 60k outside the business then before the business can start providing a return on investment it must give you a return of 60k. Anything above will be a return on investment. The contribution you (the owner) make to the business in labor is included as the Owner Labor in the Variable and Fixed Costs. This is the cost of basically paying someone else to do what you do in the business. The actual amount you pay yourself does not really matter as any profit is the owners. So when we look at the Results page we see the Operating Surplus (which is the surplus available from the business without the contribution of the owner), and the Owner Cash Flow which is the Operating Surplus plus the value of labor provided by the owner. To determine the return on investment we then deduct the amount the owner gave up to wok in the business and deduct an allowance for depreciation leaving the Business Return. Which is the amount the business investment really provided for the owner. I hope this makes sense, if not let me know.

Question and Answer Item 43 - Browse All Question and Answer Items

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