Unit 3 Practice Assignment—

Krazy Kakes finance support

Chuanqi Wang

Costs for KK (P1)

Start-up & Operational costs
Start-up costs: The costs needed to start running the business, not do not need to be paid
again. Examples are furniture, kitchen tools etc.

Operational costs: Are the costs involved in the day-to-day operation of the business (bakery).
These needs to be regularly paid to keep the business running. Examples include employees’ salary,
water & electricity, rent, etc.

The difference between the two is that start-up cost is paid only once at the start of running the
business; however, the operational costs are based on the day-to-day operation of the business,
needs to be regularly paid.

Fixed & Variable costs

Fixed costs: Costs that do not change with respect to the amount of revenue generated or the
amount of products made; similar to indirect costs. One example would be the monthly rent of the
shop.

Variable costs: these are the opposite of fixed costs— ones that change with the amount of
products produced; similar to direct costs. Examples are raw materials, electricity, gas, etc.

Both fixed and variable costs are types of operational costs. Only that variable costs are directly
linked with the amount of products produced, and fixed costs don’t change with the amount of
products produced.

Revenues for KK (P2)

What is revenue?
Revenue is the money that is made by the businesses

Revenue = Amount of goods sold * price of

goods

Unit 3 Practice Assignment Chuanqi Wang 10YO

How may KK get its revenue?
- Large birthday cakes
- Small snacks- cupcakes, muffins, etc.
- Sale of drinks (coffee, tea, cold beverages, etc.)
The best way KK would get its revenue would be selling the cakes—after all that’s
what the shop is for. The beverages only serve as a side, and are not the main products
of KK.
Also, the cakes would be much more expensive than the drinks or smaller snacks,
and the crazy cakes can draw many customers, especially children.

Profits for KK (P3)

Gross profit
 This is the profit made by the business from its revenue of sales. This incorporates
the costs of sales (such as raw materials, etc.), but don’t consider other indirect
operational costs
 For KK, its costs of sales may include raw materials (flour, butter, etc.), and the
energy/ resources used (water, electricity, gas, etc.)

Gross profit = revenue from sales – cost of

sales
Net profit
 This is the total, actual profit of businesses that look at all costs, including fixed and
variable, direct and indirect.
 This cost would include things such as shop rent, and may include income tax
 It is also sometimes called the operational profit

Net profit = total revenue – total expenses

What are the differences?
1. The gross profit is NOT the final profit of a business, while new profit is.
2. The gross profit does not take the indirect operational costs into account, while net
profit does.
3. The net profit may include income tax, while gross profit doesn’t.

Unit 3 Practice Assignment Chuanqi Wang 10YO

Report on cost, profit and revenue for KK (M1)
Krazy Kake report
Dear Angelia,
I have highlighted a few suggestions based on finance control to improve your
business. Controlling the flow of cash is very important, this ensures that your business is
not making a loss, and is able to be making a reasonable profit.
For your current condition, it is crucial to control your cost. It’s important that your
cost is at a reasonable level, so your revenue can be starting to cover the cost in a few
months. Your fixed cost per month is 18200 AED, including rent, DEWA, insurance and
wages. Currently, this cost is too high for your revenue to cover, even if you are sure that
the revenue increases by 500 AED each month, you will not start to make a profit after at
least 6 years while with the current cost conditions (same employee numbers and salaries,
to make a revenue of over 60,000AED per month). Since the above scenario is impossible,
you would have to lower your cost. Otherwise, the business may never go out of the
loophole of loss.
Secondly, you need to carefully monitor your revenue, in order to get a clear
understanding of how the business is performing. It also helps to forecast the cash flow of
the business in the future, which then helps to make other financial arrangements such as
credits and loans. Currently you should try to maximise your revenue as much as possible.
This would help to bring the breakeven point earlier in the operation of the business, to
ensure that your business is not making too much loss before it makes profits. A very viable
way to do this is by increasing the price of your products.
In addition, the essence of your business—or in fact most businesses—is to make a
profit. Only making profit can make sure that your business survive in the market against
your opponent businesses. If there is no profit, the business would be always making a loss,
which means YOU need to keep investing into the business, or taking loans after loans to
keep the business from bankrupt. If this happens, the business will eventually have to be
closed, and you, the investor, would have had an immense amount of loss. Alternatively, if
the situation is not as extreme, you would still have no chance of expanding your business in
any way, since there would be very little money left over from the first branch.
Currently, you should try to increase the net profit rather than the gross profit. This
is because the net profit takes into account all possible costs while the gross profit only look
at sales; this means only the net profit reflects your gains and losses as an investor. In
conclusion, in order to increase the net profit, you would need to minimise cost as well as
maximise revenue; this would be the aim of your current actions.

Unit 3 Practice Assignment Chuanqi Wang 10YO

KK Breakeven (P4P5)
2009- Start-up year
Price: 5
Fix Cost: 100000

Breakeven
is here

Using the formula

Breakeven = fixed cost / (selling
price – variable cost per unit of sale)

= 100000 / (5 – 2.5)

= 40000

Unit 3 Practice Assignment Chuanqi Wang 10YO

2010- Second year
Price: 10
Fix Cost: 120000

Using the formula:

Breakeven = Fixed cost /

(selling price – variable cost
per unit of sale)

= 120000 / (10-5)

= 24000

2011- Third year

Price: 10

Unit 3 Practice Assignment Chuanqi Wang 10YO

Fix Cost: 80000

using the formula:

breakeven = fixed cost / (selling price –

cost per unit sale)

= 80000/ (10 – 5 )

= 16000

KK Breakeven report (M2)

The Breakeven analysis
 Breakeven analysis shows exactly when a start-up businesses total cost and revenue
is exactly equal, making a 0 loss, and 0 profit. it identifies for a business how many
products has to be made before making a profit
 It shows the no. of products needed, so businesses and companies use breakeven
analysis to plan the production and sales targets, as well as making pricing decisions.

Unit 3 Practice Assignment Chuanqi Wang 10YO

Breakeven For KK
Base-year conditions
 In the base year (2009), the yearly fixed cost was 10,000dhs, the variable price for
single output was 2.5dhs, and the selling price was 5dhs. In this occasion, the
breakeven point occurs at 40,000 outputs.

Second year—2010
 In the next year (2010), several changes occurred:
o There was a general increase in costs—the fixed cost increased to 12,000dhs.
This means more revenue has to be made to compensate this increased cost.
o The variable cost of single output has also increased, doubling to 5dhs per
output. This change lead to the increase of selling price as well, from 5dhs to
10dhs.
o Assuming the product is the same, the increase of 100% in price would have
made it much harder for KK to sell its product at the start. However, this also
meant that KK is making twice the amount of money by one sale (from 2.5dhs
per sale to 5dhs).
 This brings the breakeven point of the year earlier, to 20,000 sales/outputs.

Third year—2011
 In 2011, most factors stayed the same, only that the fixed cost was lowered to only
80,000dhs, which was a 33% decrease. This would positively affect KK, since less
money needs to be cut from the revenue to pay the fixed cost.
o Also, by this time, KK would have established things such as customer
relations, so that its products would be easier to sell.
o In the breakeven chart, the breakeven point is brought to even earlier, with it
occurring at 16,000 sales/outputs

KK cash-flow (P6)
The Cash-flow Forecast
- It is an analysis which takes into account of all the money flowing from and into the
business.
- It looks as how much the business is spending comparing to its gain.
- Business use it to regulate spending, and plan things such as credit to customers and from
suppliers.
- However, the cash flow is based on predictions of sales, which can never be 100% accurate,
no matter how much research is put into conducting the analysis
o In the end, when a cost too high is put into conducting the forecast, the cost may
even out-weight the benefits.

Unit 3 Practice Assignment Chuanqi Wang 10YO

 - With KK, the cash flow in the first year does not seem like a healthy cash flow, that its closing
balance stayed as negative numbers throughout the year, showing that KK has been making
losses, and its revenue cannot compensate the costs.

KK cash-flow analysis (M3)

Situation two
KK’s raw materials suppliers give her one month credit

Situation three
KK make some economies and reduce the rent to 8000dhs and wages to 5000dhs

Unit 3 Practice Assignment Chuanqi Wang 10YO

Situation four
A customer who should have paid 3000dhs in May goes on the run and does not pay the money

Situation five
The customer who went on the run got caught and paid the 3000 dh. But now all of KKs party order
customers demand that they be given one months credit.

Unit 3 Practice Assignment Chuanqi Wang 10YO

Evaluation of Breakeven and Cash-flow (D1)
Cash Flow and Breakeven—How useful are they?

Both cash flow and breakeven analysis may help an entrepreneur predict the future
conditions for his/her business. The cash flow analysis uses information of costs and
revenue to show the movement of money in and out of the business, and the breakeven
uses similar data, but it shows how long it will take for a star-up business to reach profit.
They can both provide insight into the condition of the business; however, they also
have each of their limitations, alongside with the advantages.

The cash flow forecast can provide an organized analysis of the factors crucial to a
business, and help the business owner identify periods of surplus as well as periods when
he/she would need extra financial support. This helps the business owner plan for things
such as credits to customer or credits from goods supporters, making it an effective tool.
However, there is a great proportion of probability within the analysis, since the factors
involved in the forecast, such as revenue, consists mostly of predicted factors, which can
never be 100% accurate. Therefore, the report may predict a profiting future while there’s
actually a potential danger to the every survival of the business. Although a lot of researches
are usually put into the analysis, there is still a possibility that the business is put into a false
sense of security, being unaware of the challenges ahead.
Increasing the amount of market research is so far the best way to improve prediction
accuracy, even though the prediction can never be perfect no matter how much research is
put into it. There would always be events that cannot be fully anticipated, so the amount of
research information would be extremely large for a report with high accuracy. All
researches requires cost and funding, so eventually, it’s possible that the additional
researches would lift the cost of the analysis to the point which it outweighs the actual
benefits of it.

Breakeven analysis, on the other hand, is not as heavily dependent on predictions, so

some people believe that it is a safer method of analysis. It help a starting up entrepreneur
to see how much products has to be sold to reach profit, and potentially show how long it
will take to reach the breakeven point. This can help the entrepreneur to make production
plans, as well as making or adjusting financial arrangements. For example, the entrepreneur
might want to increase the selling price or try to cut down cost to make the breakeven point
come forth earlier. In addition to those, one important thing is that it helps the
entrepreneur to understand the viability of his/her current business proposition—it shows if
the proposal of any new product is worth its cost. If a product with little potential market
still needs thousands of sales to compensate the start up cost, the entrepreneur might
consider cancelling the proposal.

Unit 3 Practice Assignment Chuanqi Wang 10YO

 Except for these benefits, it also has its drawbacks. For instance, the result would be
greatly affected by just one error in one of the factors; also, some people thinks that looking
for the break-even point might take the focus away from making profit. In addition, in the
same way that the predictions in cash flow forecast cannot be perfect, the breakeven point
is not able to show exactly how long in time it will take for the breakeven point to occur.
Another drawback is that the breakeven calculations becomes complex very quickly when
more than one product is added into the analysis—it is indeed a very efficient tool, but for
companies which are interested in only one type of product.

In conclusion, the cash flow analysis and the breakeven analysis are both very useful
tools for predicting the business’s future directions, but they are, in the end, just tools. They
are tools that help, but can only give an approximate idea, and cannot be 100% relied on;
this is due to the nature of the business market that serves as a weakness for both analysis
—the unpredictability.

Unit 3 Practice Assignment Chuanqi Wang 10YO