the net income budget
TRANSCRIPT
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THE NET INCOME BUDGET
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Net Income is what is left after all expenses have been paid. Often referred to as bottom
line income
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There are a couple of c
oncepts
we
need to underst
and before
computing n
et inco
me
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COST STRUCTURE
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A cost structure is the distribution of expenses
that make up your business
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COST FALLS UNDER TWO BIG CATEGORIES NAMELY
Fixed costs Variable costs
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CONTRIBUTION MARGIN
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Contribution margin is simply the price of your product or service less
your variable costs
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YOUR CONTRIBUTION MARGIN IS THE MUSCLE THAT NEEDS TO BEAR THE WEIGHT OF YOUR FIXED COSTS
Badly Run Business Well Run Business
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BREAK-EVEN POINT
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The break-even point is the point where total cost
equals total revenue
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THE BREAK-EVEN POINT TELLS YOU HOW MANY UNITS YOU NEED TO SELL BEFORE YOU BECOME PROFITABLE
Break-even point is defined as where: Total Revenue = Total Cost
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TOTAL COST
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To be profitable total revenue must exceed total cost. Total cost is
composite of all fixed and variable cost
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THE FORMULA FOR TOTAL COST IS SHOWN BELOW
Total cost = Fixed Cost + Variable Cost
Total fixed cost = Fixed Product Overhead + Fixed Selling and administrative expenses
Total variable cost = Variable Product Overhead + Variable Selling and administrative expenses
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NET INCOME
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Net income is total revenue minus total cost
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LOOK AT THE BOTTOM LINE, YOU COULD BE LOSING MONEY WITHOUT KNOWING IT
Net income is computed as: Total Revenue – Total Cost
Net Income per unit is computed asRevenue per unit – Cost per unit
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Illustration
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SEE AN EXAMPLE BELOW
You can also download the workbook here
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SUMMARY
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Previously, we discussed therevenue equation and how to
effectively predict our cost of doing business
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www.mybusinesskpi.com
Email: [email protected]
Phone: (417) 812-5945
Finally, we now know how to use this
information to predict net income
www.mybusinesskpi.com/NetIncomeBudget.html