ISSUE # 9 page 3 SEPTEMBER 1997

PART 1

Much of the discussion has centered on the setting up of a set of record keeping that will enable us to record our costs as they occur and to use them to accurately show where we are at in our costs and our income production.

This month I want to show how these costs figures can be used to determine how much we need to produce in order to reach a target level of income from our enterprise. Economists and accountants use a term called
COST/VOLUME/PROFIT to refer to a simple set of terms that describe the interactions of our costs of production, and our volumes of production and, bottom line, our profits from our efforts.

Our first term to look at is:
OPERATING INCOME=TOTAL REVENUES-TOTAL COSTS.
This is a simple straightforward statement, and is the basis for all that follows, after we subtract all of our costs from our income, we have our Operating Income. This is not our Net Income.

Our NET INCOME = OPERATING INCOME-INCOME TAXES.

That is a simple equation used by every business in the world, knowingly or not. Net Income is simply our operating income MINUS all expenses minus income taxes. This is what we have left over after all costs are paid, and all taxes are paid. This is what we are looking for, and will plan to make it an amount adequate to create the personal income that we wish from our efforts.

In the examples that follow the measure of output is the number of units produced and sold, and , these units will be base rocks, with our marine reef corals that we have produced.

NOW THAT YOU KNOW THESE TERMS YOUR BANKER WILL REALLY THINK YOU ARE SERIOUS :)

LeRoy

There are several other terms to become acquainted with, and these are really very simple:

USP= Unit selling price
UVC=Unit variable costs
UCM=Unit contribution margin
FC=Fixed costs
OI=Operating Income
TOI=Target operating Income
NI=Net income

These 7 terms are what all businesses deal with in one form or another in their planning, both budget and production planning. If, they do not use them in some form, they will not remain in business for very long.

The next and last term to introduce is the major one in whether a business is to be solvent, that is, have the money to pay its bills. This term is called the BREAK EVEN POINT. The Break even Point is simply that quantity of output wherein the total revenues and total costs are equal, that is, where the operating income is zero. When, the Break even Point is not reached a business is said to be -'operating in the red'.

Determining where the Break even Point is in our operations is what this discussion is about. How do we find it, and how do we determine how many units to produce to not only pass our Break even Point, but to have Operating Income to pay our taxes with and to have enough over to make Net Income to put in our own pockets? I am not going to show you how to make live rocks and reef rocks, but, you will be able to figure out how many that you need to produce to have your Net Income. Actually at the end of this is a little information on what my associate Joe Woods and I are doing in actually making our own rocks.

To determine the Break even Point we need to total our costs, this includes both fixed costs which for this purpose of rock production I am combining. In large businesses they are separated. For our purposes this includes all of our costs other then costs of production, the costs of our capital assets such as tanks, vats, and other equipment, it is those costs of producing the rocks themselves, the cement, aragonite, oyster shell, filler, the cuttings produced to mount on the rocks, the charges for utilities and supplies used, that represent our variable costs totaled.

A simple equation then:
Break even Number of Units needed = Fixed Costs/divided by the Unit Contribution

Margin.
How do we determine a 'Unit Contribution Margin', whatever that is? UCM is simply what we have when we take the sales price of a unit, and subtract our costs of production, some want to call this the profit, it is not. That comes long after.

If we are selling a live rock with colonies on it for, lets say $10 each, and it costs us $5 in costs then the contribution margin is $5.
UCM =Sale Price- Variable Costs

so, Sale Price $10-$5 costs = $5 UCM. That is the return on our production produced by that one unit sold is $5

How do we use this figure? Glad you asked. Like this:
Break even Point = Costs/UCM .

How do we determine how many $ 10 rocks to sell that will make us $ 5 in return per rock in order to breakeven on our costs, and after, to make an operating income and then a net income?

We need to know our total fixed costs, these represent the total capital costs of our operation, the equipment, the brood stock, the shipping in costs of them, any charges of our space whether rented or allocated within our homes, our total utility bills, all of the costs that we incur, that are not part of our actual production costs of the reef rocks themselves, this is our fixed costs. For our example here I am assuming that we are selling only one product of a reef rock for $ 10 wholesale.

After totaling all of our costs, we determine that our total fixed costs are in the amount of $ 12,000. This represents everything we have spent, other then the costs of making the rocks themselves. This is our Fixed Cost amount. So, how do we determine how many $ 10 rocks to sell to break even with a Unit Contribution Margin of $ 5 each.

Back to our equation.
Break even Point =Fixed Costs/UCM

so the BEP = $12,000 in Fixed Costs divided by a Unit Contribution Margin of $5 per rock ,
BEP = 12,000/5= 2400 rocks needed to break even on our costs of $ 12,000.

After we sell that 2,400th rock at $ 10, we are now past our point of meeting our costs, and on the way to making the net income that we want. The fixed costs remain the same whether we produce one rock or five thousand. If we make one rock though, we have to sell it for $ 12,000 in order to make our Break even Point. This is why this process is called Cost/Volume/Profit Analysis.

Using this process allows us to determine, on paper, how many units that we need to produce to make the net Income that we wish to realize from our efforts. We need to realize in this, that by definition that at the Break even point our Operating Income, OI, is zero, we have covered our costs only at this point.

Now, how many $10 rocks, with a contribution margin of $5 each do we need to produce, and sell, to make an Operating Income(Income before taxes) of $ 40,000?

Our Target Operating Income =$ 40,000.

let QT = number of rocks needed to be produced to produce an operating income of $ 40,000 so therefore:

QT = Fixed Costs + Target Operating Income divided by Unit Contribution Margin

QT = FC 12,000 +TOI 40,000 divided by 5 UCM = 52,000/5= 10,400 units needed to produce an operating income of

$ 40,000. This is a total revenue of $ 104,000 at $ 10 per rock each.. We will look next installment of how to reach this with fewer units.

Now this, is not our Net Income, remember that Net Income = Operating Income minus income taxes, for now, take a look at your 1997 IRS tax table and you will begin to have an idea of your after tax income.

In subsequent articles I will cover the Internal Revenue forms used to declare the income from our enterprise, and the information that is entered on it, and, how to minimize our taxes, notice, I said minimize, which is legal, not evade which is not.

Also we will continue on with the ledgers and journals of the last article, and show a simple balance sheet method so you can have a picture of where you are at. I still strongly suggest that you look at the computer accounting programs available such as Quick Books and Peachtree and that you choose one and use it, they both are relatively easy to learn and use and have tutorials within them to help you set up your books, I like Quick Books the best, but both are good and of course there are others available, I am just familiar with these two, the main thing is to work with an accountant, get your own books set up, use them, and keep them up to date, and , know when you are making money, and not losing it.

In the August issue the explanations for the journal entries in the transmission of the data to GARF got scrambled so that it shows up in another column, read the data that is descriptive of the transactions and it belongs under the transaction, not in a debit/credit column, and you can refer back to earlier issues.

One last point, the recent issues of the newsletter have included articles on the making of base rocks or Aragocrete^TM, and this is an ongoing area of exploration for Joe and I. We are now curing some rocks made with a "rice a roni" mix, of #3 Portland, aragonite, or oyster shell, and minute rice and pasta, in this case 'ziti' and what else ? "Shells'!

Use the rice and/or pasta as no more then 1/5th of the non -cement addition, I like the appearance of the ziti as it makes 'tunnels' in the rocks. The shells of course leave shell impressions when they dissolve or rot out. We are going to try some freshwater crayfish in cleaning these in a slow freshwater cure through this fall. I have also poured some large ones of Tom's 'cookie' style over a small pile of sand, just 'dumping the stiff mix over the mounds of sand so that when cured out, the inside of the rock is a hollow core when the sand is left behind, when made with the pasta which is left behind in either dissolving or being eaten by crabs or crayfish, you have a hollow core Aragocrete^TM rock with many holes through it for organisms to colonize and a very natural appearing rock to sell.

Tom and I have both discussed back and forth the need for a very thorough cure on the rocks before we try to get out coralline growth on these rocks, I am now curing all rocks at least a month in fresh water before adding to any living salt water system to avoid any pH rises as has happened for us. Once you see an algal bloom of any kind on the rock it is unlikely to make any further pH changes, but, test your water closely and use caution if you are going to add any quantity of new rocks to your tanks or systems.

Keep trying different things and share what you learn with LeRoy via the feedback areas of the newsletter, talk to you next month.

My interest in salt water marine life began about 2 years ago when I decided that fresh water tanks were boring and I jumped right into salt water. Now, my first attempt was a failure but, my second attempt was a great success and then I got my second aquarium which I turned into a reef. It was great but after about four mothes it started growing lots of "hair algae". From there on it was down hill the best piece of advice I could give to the beginner is to read as much as possible before you start. If I had of done that then my tank would look good. I would later learn that I had left the lights on for too long, sometimes as much as 12 hours a day.

A couple of months later I started a second reef and the same thing happend again but this time I read every peice of information I could and talked to everybody I could. Then about year later I started up a third reef tank and it is still doing great I've managed to keep algea from over growing the tank and it looks great now. I know what you all think that I went out and bought the very best algea control system. But the fact of the matter is that in truth all I did is buy about 15 astreas snails and about 10 blue leg herbivorous crabs and that is how I kept the algae down. and that's how I got started. As to my second reef tank It has been cleared of algea via light deprivation, I have introduced astrea snails and the blue leg hermit crabs. My first tank is also still alive and contains a brittle starfish (16 inches across) and a marine beta. The starfish has eaten the snails that I have put in this tank. So It has become a pure salt water tank with no corals, though I now have some coraline algea growing on the live rock.

I am currently growing some green star polyps,mushrooms corals 3 varities,one leather coral and one knobby gorgonian a little colony of bottom polyps and by the end of the year I plan to be growing some fiji and bali xena and some brown star polyps and more mushrooms and maybe some aquacultured liverock. I would like to give a special thank to owner of Marine Aquatics for all the help he has given me. He has great selection of corals he maintains in his store. He also has a good selection of fresh and salt water fish. On top of all that he has agreed to buy some of my captive raised corals and my aquacultured live rock.

I guess since I am home schooled, that my parents have provided many books on oceanagraphy. It really helps a lot that my parents support me. One of the books they bought me, "The Reef Aquarium Volume 1" I feel is a necessity to a serious aquaculture person. But since I'm a in junior high there are many more things I have discovered that are related to the ocean for me to study.

I would like to give a very special thanks to all the people at GARF for their help in teaching me to propagate corals successfully and for these great reef aquarium farming news. They have helped me to set up my own coral farm and I would like to encourage every one with the resources to do so because the reefs of the world will not be there forever if we do not start replanting them. Soon there may not be a reef to replant. Please do not misunderstand me I am a realist not a environmentalist.

I would like to give my thanks to my famliy

THANKS!!!!!!!!!
Michael E. Vendetti
R.R. 1 Box 10
Chenoa, IL 61726
avendett@dave-world.net

Michael has won a $50.00 Reef Janitor gift credit for all of the feed back he has provided. So now his reefs will really stay clean :) LeRoy

Sally Jo Headlee

Many dedicated individuals and Companies have spent an incredible amount of time and energy figuring out ways to keep this hobby alive. With the new theme being propagate several people have stepped up to the plate and decided that they want to start a business or perhaps make some money growing corals and selling them for a profit.

I come from the old school of it takes money to make money. There is so much involved in trying to run this kind or any kind of farming business. There is a period that you have to pinch your pockets for your left over dimes before profit can be made.

Running a successful business requires some planning. There is some basic research you should do before you decide to farm corals full time. It doesn't matter how many corals you can grow if you can't sell them. If you don't know your market, how to advertise, or even more importantly where to advertise you will be defeated before you begin. A large number of new businesses fail because they grow and expand their company much too fast.

What I want to do by writing this article is to give you some guidance and direction so that you can make sound decisions. I do want to say the information that is being freely shared about how to set up your financial frame work is truly a gift. Be sure to read the articles in the past several issues as part of your research project.

The first lesson I want to teach you is how to set up your first mission statement. This statement has to explain briefly what your business is all about. The people you intend to reach, the ways you intend to reach them, the foundation you wish to build and why you exist. If it is to be of any value it needs to be brief. A mission statement can serve as a constant reminder and frame of reference for all organizational plans and activities. Such a guideline will help from going off on different exciting tangents. It keeps you focused and this alone breeds the success you are looking for.

After building your Foundation the Mission Statement you are ready to sit down with your pencil and scribble out your goals. These need to be clear and achievable goals.

This story I want to share at this time is a story I've shared with LeRoy many times. Sometimes to make all this planning make since or have a purpose I reflect in the real world and seek out examples that I can use that other people can identify with. I use our Boise State Football team as the example.

When I first bought my season tickets to watch the Boise State Football team play we had a coach that was loosing every game (I mean really loosing bad). Well they decided to get rid of him and hired a new coach. This coach was supposed to be the best we could hope for.

I decided to buy season tickets again and low and behold we lost every game again (I mean really bad). The next year, glutton for punishment that I am, I bought the same season tickets. This time with the same coach we won every game and went to the nationals.

What I learned from this experience was that the second coach inherited the team for his first season. When he stepped into his second season he picked and choose the team he needed to win. For example if you have a great quarterback but no receiver you will never win. Even if you have a great quarterback and a great receiver but no line to block you will get no were. The team is soooooo important to your mission. You all need to be playing by the same rules and understand the direction one is going.

If you want to win you have to set goals. How do you know when you're there if you don't know where There is? You cannot simply play it by ear. A good plan can accomplish the most for your business.

This is where I want to speak from my heart do not plan and set goals that you cannot reach! Be realistic and committed to this part of the process it will, believe me, pay off in the long run.

Here is the best break down of elements of planning.

The Process: It is a complex one that involves not only setting goals but organizing how they will be implemented.

A Mission Statement: We briefly discussed this earlier but to be right to the point it says who you are and why you exist.

A Vision Statement: What business you are in and in general terms what you plan to do, and whom and what tools will you need to get it done. When you start this journey you must take it one step at a time. You have to take responsibility for your product, your income, your expenses, taxes, staff, organization, and market. It will not come to you by itself that is why they call it work.

Strategic Plans: Primarily long range in nature, they identify organizational goals and they target your client. A strategic plan makes you look at how you plan to do it at least in general terms. It should seek to answer the question How do we get from where we are now to where we want to be. In the process, it makes you define your goals and policies, which help eliminate the fuzziness and superficial consensus under which many businesses operate. This is the plan that spells out the vision, but in more concrete terms.

The Annual Plan: The strategic plan lays down the markers in long range terms. It is only a vision for the future as you would like it to unfold. We now must break these down in bite size pieces. We need to identify who we need to get the job done. What supplies we need, what facility to use, supplies, advertising, all things that make a business run smoothly.

This is why I named this article Don't quit your day job (YET). The dream will unfold in time and believe me time is something money can't buy. You need the stability of income before venturing off in a new direction that is just starting to come about. This hobby will be here for a long time. The way to put your best foot forward is to come up with a solid Foundation. You can go to your bank and get a loan if you have done your homework.

This is a research project that can be fun and very educational. Go to other pet stores, call other propagators, get a feel for what you are getting into.

I love this part of my job. I love to put together budgets, set goals and celebrate when they are reached. Another thing that I have learned throughout my involvement with business is just because it didn't work the first time doesn't mean it won't work the next time and if it worked the first time doesn't always mean it will work again. All things change around us and you need to stay ready for this.

I would love to answer questions and if you like this article I will continue them in the next issues. It would be helpful to get your feedback and to find out if you have interest in this area. I am well informed and love to work on this part of the business.

Thanks to all of you who read our newsletter and as always I hope they continue to be helpful and informative. Don't forget to read my other article on my reef update in this newsletter.

Until next time.