In making business decisions, one of the major decisions to make is whether to buy your property or to lease.
For starting business owners, the common decision is to take commercial properties for lease. However, most business failures blame fixed costs as a capital drainer, and such fixed costs commonly include rent dues and utility costs.
As a business owner, you need to know your capacity. Here are some points that you might want to consider in decision making.
Evaluate your capacity
The best way to evaluate your capacity is to perform a cost-volume-profit (CVP) analysis. In CVP analysis, you look at the relationships between cost, volume, revenues, and profits.
In this specific type of decision, you are looking at increased fixed costs due to rent. A popular CVP analytical tool is to compute the breakeven point in units. The breakeven point in units is the minimum number of units to be sold reach zero profit.
For example, commercial property rental rate per month is AU$1,000. In one year, your cumulative rent is AU$12,000. To compute for breakeven, you need to follow this formula:
BEP in units = TFxC ÷ (SPU – VCU)
TFxC = total fixed costs
SPU = selling price per unit
VCU = variable cost per unit
Variable cost is the cost that responds directly to changes in volume. If you have higher sales, the total variable cost will be high. However, the variable cost per unit remains constant.
Assume that other fixed costs amount to AU$3,000 and commercial properties for lease per year is AU$12,000, total fixed costs would be AU$15,000. If the selling price per unit and variable cost per unit is AU$20 and AU$12, to compute the BEPU:
BEP in units = 15,000 ÷ (20 – 12)
Thus, the break even point in units is 1,875 units per year or 157 (rounded) unit sales per month.
Analyzing the numbers
If the commercial real estate for lease Sunshine Coast area is more or less the same with the estimate above, you would have to sell at 1,875 units per year to achieve a zero profit.
The breakeven sales would be AU$37,500 (1,875 units x AU$20 per unit). If you go beyond the breakeven, you have a profit. If otherwise, you are at a loss.
However, keep in mind the CVP analysis is only a short-term decision-making tool. If you are planning of acquiring commercial property for sale Sunshine Coast area, CVP will not apply. In financial management, the appropriate decision-making tool is capital budgeting techniques.
If you decide to buy a commercial property, breakeven will decrease due to decreased fixed costs. The breakeven point will be at 375 units. However, buying commercial property entails more costly.
Whether commercial properties for lease or sale, your goal is to choose the alternative the yields more profit. It is your role as a manager to achieve that goal.
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