Home' Trinidad and Tobago Guardian : June 15th 2017 Contents JUNE 15 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG17
Crunching the numbers
This of course does not mean that John can-
not afford the new overhead on his current
cash flows or capital reserves.
Assuming that this initiative is being con-
sidered separately, John's initial capital outlay
would include the rent deposit ($15,500 x 2
= $31,000) and a buffer for the overhead for
two more months ($31,000) until cash from
the projected workshops start coming in. He
would also have a set up cost of $90,000, which
brings his initial capital outlay for this option
to $152,000 ($31,000 + $31,000 + $90,000).
Compare this to the flexible plug and play
feature of Option A which only requires three
months rent up front and the two additional
months until the workshops get underway:
($9,000 x 3 = $27,000 + $18,000 = $45,000).
One other notable difference between the
two alternatives is the spaces: Option A, offers
a miniscule 64 square foot private office but
with all amenities included albeit shared with
other tenants, whereas Option B offers a dra-
matic 624 square footage that can be custom-
ized to suit his individual needs. Compare this
now to the existing space, which is a quarter of
When we bring price and square footage to-
gether we see the following:
Existing Space: $1,938 / 156 sq ft = $12 per
Option B: $15,500 / 625 sq ft = $24.80 per
So, on the one hand, there is a very high
premium for access (only) to a top-notch fa-
cility with Option A and on the other hand,
double the square footage cost for a combi-
nation of access and ownership with Option
B where he would enjoy the modern facilities
but own the furnishings (albeit a depreciable
asset). How does one choose between these
As far as John is concerned either Option A
or Option B is a significant improvement in
his existing conditions, which is expected to
contribute to his business growth and success.
The question is: which option would bring him
the greatest benefit?
There is a saying "price is what you pay but
value is what you get"
Interestingly, value is for the most part a
subjective thing. The value comparison be-
tween these two options will depend on how
John plans to use either space to his advantage.
We cannot say for certain what are his cri-
teria for making this decision but we can as-
sume that if Option B were properly outfitted
he may be indifferent between the two options
because the primary focus seems to be access
to a training facility.
It must be noted that John could probably
outsource such a facility on an "as needed
basis" at a lower cost similar to what obtains
with Option A. He would not have to commit
to a heavy overhead for two to three years but
still be able to fulfill the objectives of this new
The deciding factor
Each option has its own merits depending on
how John plans to utilise the respective spaces
in accordance with his business strategy.
Having the flexibility of Option A where he
can use the training room on demand means he
can keep his monthly overheads lower and only
pay for space as it is needed. This flexibility
is very good in the short-term if John is still
testing the workshop market. If things do not
turn out as he wished at least he would not have
put out $90,000 to set up and carried $6,500
extra (Option B: $15,500 - $9,000: Option A)
in monthly overheads.
The disadvantage with Option A is, as train-
ing becomes a mainstay of his business, the
variable cost per session may eventually be a
burden and cut into his profits.
If John is certain his training will take off then
he may be better off going with Option B where
he pays one fixed cost and as his schedule of
workshops increases. In a way the fixed costs
for the space would be spread across a greater
number of workshops as volume increases.
Numbers tell the story
At the risk of oversimplifying the numbers,
if John were to do one workshop per week with
a class size of 15 people at $650 per head he
would generate a monthly gross revenue of
$39,000 ($650 x 15 x 4 weeks). If this were
done under Option A the monthly variable
cost (all other variable costs omitted) would
be $14,000 ($3,500 x 4 sessions).
The gross profit would be $25,000 ($39,000
- $14,000), which would then contribute to
fixed costs such as rent then to recovery of
the initial capital outlay and net profits. Now
if the workshop start in the fourth month and
continued consistently thereafter, John would
have recovered his initial outlay in the sixth
month (factoring only rent in this calculation).
If we applied the same revenue figure under
Option B, John would have recovered his cost
in the tenth month.
The picture changes dramatically as work-
shops become more frequent.
Let us say he did better than planned and
scheduled two workshops per week; gross
revenues would be double at $78,000 ($650
x 15 people x 8 sessions) and if he were oper-
ating under Option A the variable cost would
be double at $28,000 leaving a gross profit of
Cost recovery would occur in the fifth
month. When we compare this with Option
B, not being burdened by a heavy variable cost,
John would recover the initial cost in only six
months and by the ninth month would have
surpassed Option A using the same revenue
If John is confident he can sell many work-
shops early in the game then Option B is better.
If, however, he is still in testing mode and is
uncertain about the future of training, and does
not have significant capital reserves, Option
Nicholas Dean (CertFa) is a certified
independent financial adviser and is the
managing director of The Financial Coaching
Centre Ltd. If you have any questions or
need advice on today's subject please email:
firstname.lastname@example.org or visit website: www.
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