investment

[sabeer]

When we lease a building we might pay investment to building owner .
could i consider that along with the fixed asset while computing the total cost of a new business to see the break even pont
bcz the amount is given back by the building owner only when we stop the business


Thank you

sabeer

 

[Counterofbeans]

What does it mean, "we might pay investment to building owner?"

 

[sabeer]

What does it mean, "we might pay investment to building owner?"

Ya , it happens . we should pay a huge money as a deposit to the building owner
he will pay back that when we close the shop. In that sense i call it investment.

 

[Counterofbeans]

Ya , it happens . we should pay a huge money as a deposit to the building owner
he will pay back that when we close the shop. In that sense i call it investment.

That's fine. It doesn't matter to me what it's called, I just want to understand the cash flows.

Ultimately, if you are going to pay a deposit upfront and you expect that deposit to be returned to you, I would set that up as a long-term asset. This should NOT be considered a fixed asset, nor part of the building.

As such, unless you expect to receive cash back less than what your initial deposit was, which would generate an expense, I wouldn't consider this as part of any breakeven analysis. I suppose that one could argue certain internal charges might want to be considered, but that seems outside the scope of your initial question.

 

[bklynboy]

Ya , it happens . we should pay a huge money as a deposit to the building owner
he will pay back that when we close the shop. In that sense i call it investment.

Are you referring to "key money" as is customary in Korea or is this just a rental deposit to cover potential damages? What country is this happening in?

 

[sabeer]

Are you referring to "key money" as is customary in Korea or is this just a rental deposit to cover potential damages? What country is this happening in?

No it's not key money, key money is an expense that will not come back. but this is like a deposit they keep it until we closed our business and leaves the shop.

he said it is like a long term asset. my question was , can we consider this while computing break even point.

 

[Fidget]

Include it. Whether you're getting the money back or not is neither here nor there for the purpose of breaking even - you've paid it upfront and therefore need to consider it as a cost in establishing at what point you're going to break-even.

 

[Counterofbeans]

Include it. Whether you're getting the money back or not is neither here nor there for the purpose of breaking even - you've paid it upfront and therefore need to consider it as a cost in establishing at what point you're going to break-even.

Huh?

Please help me understand this, for I disagree.

What is your definition of break-even point?

In my mind, it's the point at which expenses and revenue are equal. As such, how can something be an expense if you are getting it back? At best, I could see an argument for recording some internal charge (i.e. record the deposit at NBV or something and, perhaps, record interest expense), but that's about it.

Are you thinking something along the lines of cash-flow break-even or something?

Your use of the word, "cost" here is also interesting. Yeah, I suppose one could consider this deposit as a, "cost," as it hasn't been consumed in operations, but the fact that you're going to get it back means it can never be an expense (i.e. it won't ever be consumed).

The only break-even calculations I've ever done have been comparing expense to revenue. Calculating the break-even point of an asset seems very strange to me...

 

[sabeer]

Sir you said it can be treated as a long term assets but it won't ever be consumed.

In the break even analysis , we consider fixed cost also to get the no profit no loss point with a formulae= Fixed cost / Sales - Variable cost
Here we include land, building, machinery and furniture costs as fixed cost. This costs(land, building) also can be sold later to a price.

So here is my confusion , in that sense can we consider this deposit(long term asset) in calculation of break even analysis.

Thank you very much for your support

 

[Triest123]

Sir you said it can be treated as a long term assets but it won't ever be consumed.

In the break even analysis , we consider fixed cost also to get the no profit no loss point with a formulae= Fixed cost / Sales - Variable cost
Here we include land, building, machinery and furniture costs as fixed cost. This costs(land, building) also can be sold later to a price.

So here is my confusion , in that sense can we consider this deposit(long term asset) in calculation of break even analysis.

Thank you very much for your support

=> The fixed assets refer to those assets which are used to generate operating revenue.
We will provide depreciation for the fixed assets (normally base on their useful life)
as they will be consumed when in use.

The depreciation is the fixed costs (expenses) and the costs of fixed assets is capital
expenditure.

Breakeven only concerns the revenue and expenses arising from operating activities
(of the core business) rather than capital income & expenditure.

Since the rental deposit are not used in generating operating revenue, so it should
be excluded from computing the breakeven.

 

[Fidget]

Are you thinking something along the lines of cash-flow break-even or something?

Yes. The break-even analysis is a tool for giving you an indication not only of when revenue=expenses, but also what price to charge. And since deposits tend to come with conditions attached to them, there's no guarantee the you'll get it back in full, if at all. Therefore, it makes sense to include it.

 

[Samir]

Typically, I'll use this initial deposit for a 1st year breakeven cashflow, but not for the income statement since like has been said, this is a long-term asset.

Years 2+ won't have this initial cash requirement so the breakeven cashflow for these years is much closer to the income statement.

 

[Fidget]

exactly.

 

[Counterofbeans]

=> The fixed assets refer to those assets which are used to generate operating revenue.
We will provide depreciation for the fixed assets (normally base on their useful life)
as they will be consumed when in use.

The depreciation is the fixed costs (expenses) and the costs of fixed assets is capital
expenditure.

Breakeven only concerns the revenue and expenses arising from operating activities
(of the core business) rather than capital income & expenditure.

Since the rental deposit are not used in generating operating revenue, so it should
be excluded from computing the breakeven.

My sentiments exactly (as stated in my reply above)

Yes. The break-even analysis is a tool for giving you an indication not only of when revenue=expenses, but also what price to charge. And since deposits tend to come with conditions attached to them, there's no guarantee the you'll get it back in full, if at all. Therefore, it makes sense to include it.

See comment below

As such, unless you expect to receive cash back less than what your initial deposit was, which would generate an expense, I wouldn't consider this as part of any breakeven analysis. .

Breakeven analysis shouldn't involve assets, only expenses. I don't understand the logic that management needs to consider a cash outflow that is (materially) expected to be returned as part of the sales price; that makes little sense to me.

Based on the responses I'm reading, it looks like there's a desire for the income statement to represent cash flows. This is a very risky endeavour. There's a reason why there is a SOCF and a cash budget, neither of which are necessarily representative of an income statement.