Frank and Peter of Green Lawn Landscaping are estimating the breakeven point in terms of customer transactions. In order to accomplish this we start ith the operating expenses for the first year of operation. These are projected to be $209,021 and we arrive at this number by taking in all the operating expenses except depreciation. After allocating the fixed component of each operating expense, we come up with a total fixed cost of $79,552. What this means is that even if the Green Lawn Landscaping does not have a single dollar in sales in the first year, they will still have to face fixed operating expenses of $79,552. With wages and related employer taxes, we have factored in a fixed component of 25% - since this is quite realistic for any business. Even if Frank and Peter were to stop taking their salaries, they still have to pay their employees.
Once we input these parameters into the break even analysis template we find that for each sales transaction of $350. Gross profit in this service business is 100% simply because there is no cost of good sold. It does not cost Green Lawn Landscaping anything to create its service unlike a product where there is an inherent cost like raw materials and labor that is needed to produce the output.
After dividing the fixed operating expenses of $79,552 by the $350 of gross profit on each transaction we come up with a break even number of 227 transactions for the first year of operations. This is how many transactions will have to be successfully completed by Green Lawn Landscaping in order to be able to keep the lights on.
In our sales projections for 2016, 2017 and 2018 we are projecting that even in a slow market environment we will be conducting 617, 659 and 702 transactions respectively. Thus given that we are projecting 227 transactions as the minimum needed to break even in the first year, we feel extremely comfortable with the viability of Green Lawn Landscaping being a successful firm in the years ahead and being able to meet the expectations of growth and profitability set forth in this business plan.
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