Taking Your Business To The Next Level

Breakeven Point for Your Business

Every business owner needs to understand the ‘financial dynamics’ of his or her business. That starts to sound pretty complex until you realise that a few key numbers are generally all that is needed to keep the business owner well-informed about the health of their business.

Firstly, it’s important to know when your business starts to make money – ie profits – in any given period.

Any business will have a combination of Fixed and Variable Costs. It is vitally important for the Business Owner to understand at what point the profits we make on sales exceed the total of the Costs. This point is known as the Breakeven Point.

What is the difference between ‘Fixed’ and ‘Variable’ Costs?

Simply put, ‘Fixed Costs’ represent those costs that apply just by way of ‘opening the doors’ of the business, regardless of whether you sell anything or not. Included in this list will typically be items such as rent, rates, electricity, accountant’s fees, employee salaries, vehicle costs and so on. These costs are fixed, in that they do not change with the amount of business you turn over.

‘Variable Costs’, as the name implies, do change with the business you turn over. Basically, they are the costs you incur purchasing items (or labour, in the case of a service business) you will sell. They are sometimes called ‘COGS’ (Cost of Goods Sold) or ‘COPS’ (Cost of Providing Service) depending on the nature of the business.

Only with a clear understanding of how your business operates can you accurately allocate your costs into the ‘Fixed’ or ‘Variable’ categories. And it’s only once that accurate allocation is made, can you really understand the ‘financial dynamics’ of the business that we mentioned at the top of this article.

So, we have determined that the ‘Breakeven Point’ occurs when the profits you make from sales cover the total of the Fixed and Variable Costs. We can understand this more easily by taking a look at the figure below:

In the figure the vertical axis represents $s while the horizontal axis represents the number of items sold.

The Fixed Costs are represented by the green, horizontal line. As we have seen, they represent the costs of just being in business – opening the doors – (rent, electricity etc), and do not vary with the numbers of units sold.

The Variable Costs are represented by the ochre line, which starts at the zero point and increases with the number of units sold. This line can be termed ‘COGS’ (Cost of Goods Sold) or ‘COPS’ (Cost of Providing Service).

So the Total Costs of running the business is shown by simply adding the Fixed (green) and Variable (ochre) Cost lines. In the figure it is the red line.

All Business Owners hate costs. If the total costs are the ‘bad news’ for a business, then the sales are the ‘good news’. The ‘Sales’ are shown by the blue line in the figure. It starts at the zero point on the figure and grows with every unit sold.

So, when the Sales (blue) line crosses the Total Costs (red) line the business is in profit. That is good news! When we are trading above Breakeven, the profit generated is shown on the figure as the difference between the sales and fixed costs lines.

When we are trading below Breakeven, the loss is shown, once again, by the difference between the total costs and sales lines.

It is an interesting exercise to calculate the Breakeven Point for a given trading period – say, a week. If we can calculate the fixed costs involved in running the business for that week, as well as the sales (and COGS) for the same week, we can easily see at what time and day during the week the business moved into profit. It might occur at 2:00pm on Wednesday, or 10:00am on Thursday. It’s a great feeling for the business owner to quietly note that time and day of the week and look forward to the generation of profit for the rest of the week.

The Breakeven Point can be moved around, once the mechanisms at work are understood.

What happens when the business owner increases the price of the items being sold?

Well, in that event, the figure above will show that by the ‘Sales’ line having a steeper slope – ie the $ per unit increases. In that situation we can see that the Breakeven Point actually moves down the sales line, ie to the left, and we are in profit with fewer items sold.

What happens if the Variable Costs increase – ie the price of the purchased stock is increased? Now, the ‘Variable Costs’ line will adopt a steeper slope ($ per unit, once again), which will raise the level of the Total Costs (red) line. In this instance, the Breakeven point moves to the right, so we have to sell more items to be in profit. Unless of course, if we increase the sales price, which will tend to cancel out that effect.

Breakeven Point is a key KPI for any business. All business owners need to understand the concept any know the Breakeven Point for their business.

So, how can we calculate the Breakeven Point for your business? Do we need a degree in accounting to be able to work it out? 

You can calculate it using the simple formula:

Breakeven = Fixed Expenses / Gross Margin %

Both the Fixed Expenses and Gross Margin % figures are taken straight from the Profit and Loss statement.

As an example, say a business reports its Fixed Expenses for a year to be $500,000, and the Gross Margin % is running at 30%.

Then the annual Breakeven Point for this business = $500K / .30 which calculates to $1.67M.

If the annual Breakeven is $1.67M, the weekly Breakeven is $32K (assuming a 52 week year).  So the question for the owner of that business is: What day of the week do you achieve sales of $32K?  Wednesday? Thursday? Friday?

Of course there are many other KPIs that might be important to you as a business owner.

If you would like to discuss any aspect of the Breakeven Point for your business, or, in fact any other aspect of the financial management of your business, please call us at Business Clarity.

Business Clarity can help you take your business to the next level.

If there’s one aspect that separates a ‘great’ business from an also-ran, it’s the quality of the people who work in it.

It is only with great people - well-trained, totally motivated and fully engaged - that your business will really flourish. The people – your team – provide the leverage the owner needs to do more (make more, sell more, ship more, etc) in the business – and get more out of it. And as aleay, it’s the responsibility of the Business Owner to ensure that the business always has the best people.

Your people are your business’s key asset.

So, how do we go about building that great team?

Key elements in forming a great team include:

-          A great recruitment process to find an enrol the right people

-          The quality of the leadership to engage and motivate the right people

-          The quality of the training and guidance provided to the people

-          The quality of the environment (physical and emotional) in which the people work

The first step in getting a great team together is finding the people and recruiting them. Business Clarity has a great recruitment process Business Clarity Recruit that will help any business owner with this difficult task – ask a Business Clarity coach to learn more about it.

And the very first step in that recruitment process is designing the role to be filled by the new recruit. As a quick note on what to avoid here, we can say that most role descriptions that we see (prior to our working with a client) have two major problems:

1. -          They are usually designed around a particular person – often the person currently filling that role. Rather than having a role called ‘Sales Person’ or ‘Warehouse Manager’ etc, they will be called ‘Fred’ or ‘John’. (The only way to recruitment a new person into that role is by hiring someone called John, which, experience tells us, is far from guaranteed to produce the best result…)
2. -          While most role descriptions attempt to have a list of the activities to be performed, very few will define the ‘outputs’ to be generated by those activities. Business owners will often avoid defining these outputs because, frankly, it’s tough to do. But, are we recruiting a new team member to just perform activities, or do we want them to actually produce something – ie generate an output? The latter, obviously.

The definition of the role is not easy, as we know. It requires careful thought and consideration. Tough as it might be, it is critical to the success of the recruiting process.

The Business Clarity Role-Plan is a great tool that can help you to define the roles you need for your business. We have designed it so the role definition task is simpler, faster, but – most importantly – more effective for you and your business.

Ask a Business Clarity coach about Business Clarity Role-Plan. It is just another way that we bring clarity into our clients’ businesses – and set them up to succeed.

Are you running the Australian office of a global multinational corporation?

We know it can be a tough assignment. In working with clients in this position we have seen problems arise from situations such as:

• -          Head office often lacks knowledge or understanding of the Australian business culture
• -          Head office often lacks knowledge or understanding of the Australian business environment
• -          Poor communications often exists between Head Office and the Australian office – this is obviously problematic if the home language is Japanese or French or German (for example) but it can still represent a challenge even when the Head Office is located in the United States or United Kingdom.
• -          The Australian office might represent a small percentage of global revenues, so Head Office can appear to lose sight of the local operation – until things go wrong…
• -          The Head Office corporate strategy often totally ignores – or misreads – the local market and the influences on it. Strategies and targets can be set without any understanding of the business conditions.
• -          The Head Office will often assume that all customers are the same, worldwide and find it difficult to grasp that Australian customers might have different requirements, priorities or perceptions.
• -          The politics of the Head office are unfathomable, and just serve to stymie every strategy that the local office attempts to roll out.

So how can Business Clarity Executive Coaching help?

The Business Clarity principals have extensive experience working at senior levels – successfully – with and within offshore head office businesses. We’ve all cut our professional teeth in that environment, over many decades.

We know how important it is to establish real mutual respect between the offices – and how to do it.

We know how to work with Head Offices to help them understand the local business culture and the influences prevailing on the local business conditions.

We have helped Head Office groups understand the demands of the local market, and (perhaps) the need to tailor global products and services for Australian customers.

We can help you navigate the politics of the Head Office. We have an excellent record in helping the local office make sense of it all and learn to achieve its objectives within – or in spite of – the corporate political environment.

We have even led (notably successful!) campaigns to market Australian-originated products back into the global corporations, which is quite some achievement given the normally somewhat insular nature of most corporate head office operations. A real-world David and Goliath success story…

How have your dealings with your Head Office gone in the past? Can Business Clarity Executive Coaching help you build on that success?

Call us on (02) 9683-6311 to discuss your situation with a Business Clarity Executive Coach. We can help you take your business to the next level.

Do you know what benefits the customer will get through dealing with your company? If you can't think of anything specific, try this.

1. Jot down on the left hand side of a piece of paper in bullet points the great features of your products/services. For example, a bathroom company might have...

• Custom made vanities
• A complete package
• High quality work

2. Opposite, translate each feature into benefits. Think emotion: how will the customer feel. For example, they might say...

• "Unique vanities - we custom design to enhance your bathroom layout and satisfy your personal taste."
• "Our complete package saves you time, your sanity and your money. Just tell us what you want and leave all the running around to us."
• "We guarantee you will be thrilled with your new bathroom. If not, we keep working until you are. For free!"

3. Keep the benefits of your business upfront in your mind as you talk to people. And stack your advertising pieces full of benefits.

Even if your competition has similar products/services, but neglects to spell out the benefits, you're ahead.

If YOU feel passionate about your business, others will too!
Remember, in the example above, they are not selling tiles, taps and toilets. They are selling a dream.