Your Break-Even Point – Get More Cash Out of Your Business in 2022!

Break-Even Point

Your Break-Even Point

Understandably, there will be times when financial resources are limited for most small companies. When you need to make singular investments or when production or sales are down, it’s critical to have a plan in place. Do you know your break-even point? You want to keep cash in the bank and the balance sheets on an even keel. And you want to get more cash out of your business! Such a strategy is called a break-even plan.

This plan helps you to figure out the tactics to employ such that expenses are covered, using calculations of:

  • fixed costs (ex. payroll, utilities, insurance, debt payments)
  • variable costs per unit of sales (ex. production hours worked)
  • revenue per unit of sales (ex. $10.00 profit for a particular product)

Why Should You Become Aware of Your Numbers?

Whether your business is a start-up or a long-running operation, becoming aware of the numbers related to earnings and expenditures will help you know what to do when a financial shortfall occurs.

When income doesn’t cover costs, owners need to be extra careful to ensure obligatory expenses like payroll and accounts payable are met.

Business Financial Surprises

Unexpected things happen (like system or machinery outages, weather damage, staff turnover or ramp-up) … at those moments, you may need to do things like temporarily cut fixed costs and increase sales to make up for unforeseen losses or expenditures.

Case in point: A key piece of the production process, a 3-D printer, suddenly stops working. To continue to make sales, the printer must be operational. So, you must either buy a new one or engage an expert to repair it. The out-of-order printer causes immediate losses in income and also the cost of repairs or replacement, which causes a shortfall in cash to pay invoices, debt, and other financial responsibilities.

Knowing the elements that comprise a break-even plan is crucial to prepare for unanticipated events.

How To Create A Break-Even Plan

First, determine your break-even point; of course, this figure will differ from business to business.

There are two main situations that result in different actions or expected outcomes:

Break-Even Point Is High:

  • In this case, a company is forced to have a broader customer base to ensure more income
  • Spends less time in making a product that all customers like but on a product that most of them won’t dislike
  • With time, this situation leads to the need to decrease price points and margins
  • With the decrease of prices and margins, company owners may have the temptation to increase the break-even point again, creating a vicious cycle.

Break-Even Point Is Low:

  • The owner begins to target smaller and more attractive niches (examples?)
  • The company can provide more value (like better quality or faster turnaround) to the customer since these owners typically know their niche needs
  • By providing more value, the business builds a better brand, which leads to a justifiable increase in prices or margins
  • Over time, higher prices or margins allow for a reduction in break-even point.

Having a low break-even point allows for (1) diversification in a financial lull; (2) more value to the customer; (3) stronger branding; and (4) decrease in the break-even point.

Here Are Some Best Practices to Implement a Break-Even Plan

Some recommendations and ideas when developing or implementing a break-even plan:

  • When creating a break-even plan, you should ensure that managers have a chance for input or review during development and, say, annually.
  • At a minimum, include the following in the plan:
    • Calculated break-even point
    • A point-in-time plan to cut fixed costs (ex. reduce insurance coverage or carry out temporary layoffs)
    • Suggested approaches to increase sales (ex. coupons or marketing campaigns)
  • If business draws near the break-even point, owners and managers must act immediately to ensure debts can be repaid and there are sufficient funds for payroll, insurance, and other mandatory expenses by one or more of the following choices:
    • Cutting fixed costs as much as possible
    • Implementing a way to increase sales
    • Temporarily increasing prices
    • Attempting to collect unpaid debts or balances
    • Obtaining a short-term loan
  • Avoid the common mistake of just cutting costs and then increasing prices.
  • When implementing a break-even plan, ensure that customer service becomes a higher priority in order to maintain customer satisfaction.

Conclusion

A well-considered break-even plan requires some investment of time, thought, and financial facts, but yields a very high return when a shortfall in cash occurs. Not only can such a plan to save a company from financial crisis/ruin and help lower its break-even point, but also can lead to more stability and the opportunity for you to raise prices. Do you have a break-even plan in your business? Do you think it would help you?

 

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Using a Break Even Plan For a School Bus Company

Break Even Plan

 Break Even Plan For a School Bus Company

This week I’m writing about using a Break-Even Plan. A Break-Even Plan will stop the bleeding of your cash by temporarily cutting all non-critical expenses while driving sales above break-even by selling existing inventory. I have been writing about some of my hero clients and how we are able to achieve significant results from our work together. We have 36 Coaching Modules, which are areas within your business that when we improve your performance, your business will run better.

The Situation in Charlie’s Bus Company

Our business hero this week is Charlie, owner of a bus sales and service company. I began working with Charlie and his parents when their sales were stagnant. At that point, their business had been losing an average of $40,000 per year for several years.

Coaching Modules for Charlie’s Bus Company

We implemented several of our Coaching Modules. These included a Strategic Plan, Team Meeting Rhythm, Sales Management System, Key Performance Indicators and most importantly in the near term, a Break-Even Plan.

A Break-Even Plan for Charlie’s Bus Company

After reviewing their financials, we determined that we needed to reduce their fixed costs and grow their revenues. Their billable hours compared to their shop employee hours was too low. So, we reduced the number of shop employees. We also eliminated some extra outsourced services such as vehicle detailing. We set a goal of selling one bus a week. Billable hours and bus sales per week became two of our Key Performance Indicators. We began meeting weekly to review performance and remove obstacles.

Charlie’s Bus Company Results

The sales and profit growth were dramatic with our Break-Even Plan. Here’s what Charlie said:

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“You have really taken the blinders off our eyes to see the potential of our business and now you are taking us there. We are thrilled that you achieved growth from $651,000 to $1,100,000 and a profit increase in excess of $181,000 since we started working with you in January.”

Congratulations Charlie on your impressive growth of your sales and profits using a break-even plan. You are a true business hero and an inspiration to us! You can view another case study about using an Employee Acquisition Plan in an auto repair business here.

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Using a Revenue and Profit Budget: Pest Control Business

revenue and profit budget

Revenue and Profit Budget: Pest Control Business

This week I’m writing about using a Revenue and Profit Budget in a Pest Control Business. Your budget should forecast discretionary cash-flow, identify your required working capital, and demonstrate your ability to service debts and deliver a return to investors(which may be you).

I have been writing about some of my hero clients and how we are achieving significant results. We have 36 Coaching Modules which are areas within your business under the categories of growth, profits, and freedom. So, when we improve your performance, your business will run better.

Jonathan’s Pest Control Business

After reading one of our social media posts about budgeting, Jonathan contacted me. As the owner and founder of the business, he had been able to grow it steadily. Yet, Jonathan wanted to learn about budgeting and how to put in place a Revenue and Profit Budget in his business. He had had some financial setbacks throughout the years. At that moment, his daughter would soon be leaving for college. So, he wanted to take his large family to Hawaii for several weeks. Additionally, he planned to travel frequently with his daughter to her volleyball tournaments.

The Revenue and Profit Budget Implementation

We took Jonathan through a coaching module and provide a revenue and profit budget template for him to fill out. After a couple of iterations, we had the budget finished, which included sales, gross profit, expenses, net profit, and cash flow.  This is a great tool to set goals for all the above and then monitor your actual performance against your goals. It also serves as a great check and balance for surprise sales and expenses. It helps you to “know the story” of your business’ financial performance.

Other Coaching Modules for Jonathan

As we began to review his business, we saw an opportunity to put in place some of our other Coaching Modules in his business. At first, we decided that a Tactical Marketing Plan and a Break-Even Plan could help Jonathan. But we also decided to increase his pricing and standardize his billing. We were able to develop his Strategic Plan and then held a plan deployment meeting with his team. We worked weekly on deploying these strategies.

The Results for Jonathan’s Pest Control Business

As a result of these strategies, we saw a significant increase in Jonathan’s sales and profits. Here’s what Jonathan said:

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“Using Small Business Coach Associates has been a real benefit to my company. Alan has the perfect combination of business knowledge and real world experience. His willingness to help and hold me accountable have helped me in positive ways that I couldn’t have anticipated. After only working together for 3 months we have deployed 3 strategies that will increase my small business profits by 90% in the next 12 months.”

Conclusion

Congratulations Jonathan on growing your sales and profits using a revenue and profit budget in your pest control business. You are a business hero and an inspiration to all of us!

 

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Using a Team Meeting System for an Electrical Distributor

Team Meeting System

This week I will be writing about using a Team Meeting System. This is a disciplined rhythm of recurring team meetings focused on goal-setting, alignment, reporting, and accountability that occur on an annual, quarterly, monthly, weekly, and daily basis.

I have been writing about some of my hero clients and how we are achieving significant results. We have 36 Coaching Modules, which are areas within your business under the categories of growth, profits and freedom. So, when we improve your performance, your business will run better.

Randy’s Electrical Distribution Company

Randy is our business hero of the week. He was referred to me by another client. When he got in touch, he had experienced a theft in his business that cost him more than $100,000. Randy is near retirement and we are working to prepare his business for new leadership.

Coaching Modules For Randy’s Electrical Distribution Company

As we began working on his business, we recognized the need for several of our Coaching Modules. These included a Strategic Plan, Key Performance Indicators, a Break-Even Plan, a Comprehensive Exit Strategy and a Team Meeting System. We focused on the need to improve Randy’s gross margin which was below industry norms.

There are two ways to increase your gross margins: 1. Increase your profit on your products or services and/or 2. Decrease the cost of your products and services.

The Implementation Of The Team Meeting Rhythm

In Randy’s business, there were some employees who had great ideas about how to buy inventory low and sell it for a higher profit. So, we wanted to increase teamwork and information share within the team. After developing Randy’s Strategic Plan we met with the team to share the direction of the business and to get team buy-in. Then we decided to put in place a Team Meeting Rhythm with his team.

Results For Randy’s Electrical Distribution Company

As Randy met with his team they began to brainstorm on ways to improve profits. This new focus improved morale and they were able to celebrate a number of successes. The result was almost immediate; his margins began to increase month over month. At this point, their gross profits have increased more than $100,000 per year.

“Alan Melton as helped me see and discuss things that I wouldn’t see otherwise. We have set goals to improve profitability and productivity. Alan helped us with our team concept including communications and regular meetings. The areas that you have helped us implement have improved our Gross Margins by more than 2.5%.”

Congratulations Randy for implementing a Team Meeting System and for seeing your business and employees prosper! You are a true business hero and an inspiration to us. You can view a bus company using a break-even plan here.

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