Accounting Business Reporting for Decision Making

CHAPTER 1 Introduction to accounting and business decision making 47

(b) Break-even point

Assuming there are no variable costs, the break-even point is the projected fixed costs.

Projected fixed costs = $92 680

(c) Applying market-based and earnings-based valuations to a start-up

While we are in the start-up phase, we do not expect our returns to be competitive. However, by

benchmarking against industry norms we are ensuring we are focused on what we need to do to be

competitive. We understand through personal enquiry with Brisbane Consultancies that several busi-

nesses similar to ours have been offered for sale at an average industry multiplier of 0.8 times annual

turnover this year in the greater Brisbane area. Using this benchmark, our business may theoretically

be worth as much as $76 000 at the end of the first year.

Market-based fees (revenue multiplier) = $95 000 (Fees) × 0.80 (multiplier) = $76 000

In the medium term, revenue multipliers may be a quick, easy and useful measure. However, during

the start-up phase a better measure of performance may be to calculate a price that reflects return

on investment (ROI). The ROI expected in this industry is estimated (by comparison with three

other similar businesses for sale) to be in the order of 75 per cent before allowing for the manager’s

salary (Kevin). Using this information to calculate the theoretical sale price suggests a much lower

outcome.

Earnings-based selling price (ROI) = $2320/0.75 = $3093.33

This means that in year one, the business is worth as little as $3093.33, effectively making it not at

all saleable. Of course, both of these valuation methods have problems when applied to the first year

of a start-up business, so how will we account for this apparent problem of newness?

Over the course of the first few years we would expect the ROI-derived selling price to increase

to at least on par with the revenue multiplier method once the business’s start-up costs have washed

through the accounts. In today’s dollar terms, if the turnover number was not increased that would

mean a target net profit of $57 000 is required.

$76 000 (required sale price) × 0.75 (expected ROI) = $57 000 net profit

When we exceed that net profit target (based on turnover of $95 000), then we will be doing better

than the market would require in terms of net margins. Projecting out our profits beyond the first year

could be done to predict when this might occur, but we do not feel this is credible given our lack of

data as a start-up. In future years we will certainly look to understand the trends and forward plan to

a more strategic time frame.

5.2.1 Fees forecast (All figures are in Australian dollars)

Murphy Recruiting Pty Ltd

FEES FORECAST

for the period July 2015 to June 2016

Jul. Aug. Sep. Oct. Nov. Dec.Jan. Feb. Mar. Apr. May Jun. TOTAL

Item: Business planning

Number of placements

Placement price

Total fees income

0

$0

$0

1

$5 000

5 000

1

$5 000

5 000

1

$5 000

5 000

2

$ 5 000

10 000

0

$0

$0

0

$0

$0

2

$5 000

10 000

2

$ 5 000

10 000

3

$ 5 000

15 000

3

$ 5 000

15 000

4

$ 5 000

20 000

19

$95 000

Total fees revenue $0 $5 000 $5 000 $5 000 $10 000 $0 $0$10 000 $10 000$15 000$15 000$20 000$95 000