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Do You Know Your Breakeven
| Guest post by: Bill Boyer |
Article Overview: It is critical that all business know their breakeven point and it is even more critical today.
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Free Download - Technology Versus Managing By Bill Boyer |
Do You Know Your Breakeven
In this current very unstable economy, all companies are doing whatever they can to stay afloat. It is critical for long-term success to know what your breakeven sales level is. Even more important is to know how changes in your operations can affect your breakeven point. This will help you target the areas where you should concentrate your attention.
Generally defined, your breakeven is the point in sales volume where your income equals all of the variable and fixed costs of running the operation. At this point, profit is zero. In starting to calculate and analyze your breakeven sales point, you will have to identify your costs depending on whether they vary with your volume of business. The fixed costs are those that will not change no matter how much you produce or sell. Your rent, most of your property and commercial insurance, your salary and office staff, telephone, and property taxes can be classified as fixed expenses. If you have your doors open, these are expenses you will have to pay. Variable expenses are defined as those expenses that vary with changes in the volume of what you are producing or selling. These will include labor for manufacture or service, materials consumed in the product or service, energy costs, and so on.
In starting your analysis, work with your accountant or bookkeeper and determine the total by item of each of your fixed costs on a monthly or quarterly basis. This can be shown as the base line on a simple graph (it's relatively easy to do in excel). The graph should have the horizontal axis as sales volume and the vertical as total revenue and costs.
Using some historical information, determine your total sales and total costs including the fixed for multiple equal periods (monthly or quarterly). Plot these points on your graph and project the lines as necessary. The point where the sales and costs lines cross is approximately your breakeven sales level.
Now is where you start your analysis. Even though the best way to overcome downturns is to concentrate on the top line (sales), the analysis of fixed costs can be performed relatively easily to determine if there are some potential savings. If you have not reviewed these costs for a few years, I can almost guarantee that you will find some savings. Fixed costs gradually creep up over time when they are not carefully reviewed. Small increments do not seem like much until they are added together. After determining the cost reductions, recalculate the graph to see your new breakeven point.
The real work begins with the analysis of your sales. What can you do to increase sales volume? Spend more time with your existing customers to see what else you can do for them. Can you add new products or services at good margins? Or make some modifications to your products and services that will be of additional benefit to your customers? You can generally increase prices on these to achieve a higher margin. If the business is service-related, train your service technicians to ask about other services while they are on site. Do all you can to add more value for your customers.
On the other side, you may have some less-profitable products or some customers who are difficult to deal with, or whose sales do not supply good margins. While it is always very difficult to "fire" customers or reduce your products or services, your time and effort may by better spent on other customers or new customers and/or new products or services.
One of the last things to consider is to reduce prices. It may be necessary, but cut pricing only as a last resort. There have been many analyses on the impact of price cuts and needed increase in volume to maintain the same profits. When you cut pricing it is very difficult to maintain the same margin even with volume increases. For example, if the margin is 40% and pricing is reduced 10%, volume must increase 33% to maintain the same profits.
By analyzing your company's breakeven, you should be able to zero in on the areas where making changes can have the greatest impact. This is not just an exercise for "down" markets: the better run companies always know their breakeven levels. They monitor their breakeven routinely and are quick to react to changes. You can do the same.
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Article Tags: breakeven, coaching, consulting, cost control, leadership, management, profits, small businesses
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About the Author: Bill Boyer RSS for Bill's articles - Visit Bill's website Bill Boyer has over 35 years experience working with businesses, from small to major international corporations with extensive experience in operations, distribution and finance. Bill has held CEO, COO, CFO, and other VP positions with Burlington Industries, The Disston Company and Hickson PLC and other corporations. He has also been an individual coach/consultant with many smaller corporations. Bill holds a BS in Industrial Management from the University of Richmond, and is a graduate of executive programs at the University of Virginia. He specializes in helping companies achieve organizational effectiveness and operational efficiency. Click here to visit Bill's website   The Art of Delegating |
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