How do changes in costs, sales and customer numbers affect my profits?
Your budget for the coming year will be positively and negatively affected by changes in your sales values, costs and customer numbers throughout the coming year.
top
A What If? Analysis enables you to calculate the impact of such changes on your budgeted profit by focusing on possible scenarios that may occur. This helps you to plan for such scenarios and take corrective action, if necessary.
What If? Analysis: City Grill Bar Example
Background Information
- The Hotel Grill Bar expects to serve 6,000 customers in the coming period, each spending an average of €20.
- Cost of sales are currently 40% of sales value (equivalent to 60% gross margin).
- Other variable costs, eg overtime and consumables, are 15% of sales.
- Fixed costs include full-time payrolls and overheads.
Scenarios
The Hotel Grill Bar carries out a What If? Analysis based on two possible scenarios:
| Hotel Grill Bar - Budget and What If? Analysis |
| |
Budget
|
Scenario A – Covers reduce by 10%
|
Scenario B – Prices reduce by 10%
|
| Number of covers |
6,000
|
5,400
|
6,000
|
| Average spend |
€20
|
€20
|
€18
|
| |
| Sales |
120,000 |
108,000 |
108,000 |
| Cost of sales |
48,000 |
43,200 |
48,000 |
| Gross-margin |
72,000 |
64,800 |
60,000 |
| Other variable costs |
18,000 |
16,200 |
18,000 |
| Contribution to fixed costs and profit |
54,000 |
48,600 |
42,000 |
| Fixed costs |
40,000 |
40,000 |
40,000 |
| Profit |
€14,000 |
€ 8,600 |
€ 2,000 |
| |
| € drop in profit |
|
-€5,400 |
-€12,000 |
| % drop in profit |
|
-39% |
-86% |
| |
- In Scenario 1, covers reduce by 10%. But, as fixed costs have not changed, there is a disproportionate 39% drop in profit.
- In Scenario 2, prices reduce by 10%. In this case, however, both the fixed costs and cost of sales remain unchanged as the same volume of covers is being served. At 86%, the drop in profit is much more dramatic, almost eliminating the expected profit for the period.
top
Quick Break-even & What If? Calculators
Break-even Workbook
Tips for dealing with reduced sales volumes
top