SmartClean Inc is determined to expand its operations into three new territories following successful operations in the current market. The company has been in the business for the past five years and expects to continue experiencing significant growth in the current market and other territories that are currently not served. The company envisages raising additional capital for this purpose which is expected to support operational activities in the new markets. SmartClean can access bank loans for this purpose. Current relationships with the bank are strong, and the owner is currently repaying a loan, and the remaining balance is $10,000. The company and owner have an excellent credit history which is an added advantage for debt financing.
Financing Strategies
The expansion to the new territories can be done using debt or capital from the owner or the reserves of the company. Similarly, capital can be obtained from potential financiers who are willing to invest their funds in projects with high returns. The choice as to which option best suits the company depends on its projected growth, the level of control desired by the management, availability of funds and the cost of such capital. The decision to invest in the new territories should be based on several factors including break-even analysis, the time value for money and the returns of the investment (Lumby, 2015). Care must be taken to ensure that the project does not lead to losses in the company.
Delegate your assignment to our experts and they will do the rest.
Breakeven Analysis
Break-even analysis is the process of determining the level at which an investment pays for its total cost. It is a point at which an investment can help carter for the full cost without raising any profits for the investor (Break-even Point, 2018). At break even, the company can continue operating with no fear that it will realize any losses even though it is not contributing any profits for the investor.
The company must determine the revenues that must be obtainable from each territory to cover the fixed and variable costs of the investment. Breakeven determines the profitability of a project by establishing the differences between the total revenues and total expenses. There are possibilities that the revenues generated by the company in the three territories might not be adequate to cover the full costs thus causing a loss. Break-even analysis equates the revenues and the expenditure and any excess revenues results in a profit. A deficit, on the other hand, leads to a loss.
Considering the break-even point for the company is critical. The calculations involve determining the fixed cost and the variable cost of the investment. The estimates on break-even analysis are useful to the management since they are used to determine the margin of safety that the company has, given the current revenue levels (Alnasser, Shaban & Zubi, 2014). The ability to cover the fixed cost of investing in the three territories ensures that the company realizes profits which are encouraging to the investor. The lower the fixed cost, the higher the chances that a company will require fewer sales to cover the entire value of the fixed cost.
Break Even Points in Units = Fixed Costs/Contribution Margin per Unit
=$75,000/($250 - $35)
= $75,000/215
=348,84 or 349
Breakeven point in dollars = Average charge per job * Breakeven points in units
= 250 * 349
=$87,250
Recommendations
SmartClean must serve 349 clients for it to break even and start realizing some profits. Any job services that is higher than 349 will contribute to profits while a lower number of services will lead to losses. If the company desires say $1,000 in profits, it must offer additional job services equivalent to $1,000/215 =4.65 or 5. Therefore, SmartClean must provide 349 + 5 = 354 job services (Alnasser, Shaban & Zubi, 2014). Similarly, the company must obtain finances from the cheapest sources and depending on the level of control desired. One of the best options is to use company reserves and debt financing to achieve its objectives of expanding to the three new territories. However, such expansions must consider cost-benefit analysis of the project and the potential for growth.
References
Alnasser, D., Shaban, D., & Zubi, D. (2014). The Effect of Using Break-Even-Point in Planning, Controlling, and Decision Making in the Industrial Jordanian Companies. International Journal Of Academic Research In Business And Social Sciences , 4 (5). doi: 10.6007/ijarbss/v4-i5/888
Break-even Point. (2018). Break-Even Point Analysis | Formula | Calculator | Example Explanation. Retrieved from https://www.myaccountingcourse.com/financial-ratios/break-even-point
Credit Reports and Scores | USAGov. (2018). Retrieved from https://www.usa.gov/credit-reports
FTC. (2018). Credit Scores. Retrieved from https://www.consumer.ftc.gov/articles/0152-credit-scores
Investopedia. (2018). Credit Score. Retrieved from https://www.investopedia.com/terms/c/credit_score.asp
Kumar Choudhary, P., Kumar Patnaik, S., Madhusudan Singh, M., & Kaushal, G. (2013). Break-Even Analysis in Healthcare Setup. International Journal of Research Foundation Of Hospital And Health Care Administration , 1 , 29-32. doi: 10.5005/jp-journals-10035-1006
Lumby, S. (2015). Corporate Finance . Cengage Textbooks.
