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Most business owners I meet are missing this one, most important piece of information in their day-to-day business planning. While this concept called “Break-Even” is simple and easy to understand, it takes a few key steps before it can be accurately calculated and leveraged in business. After reading this article, business owners will have a tool that will absolutely set them apart from the competition and change the way they think about profitability and how to produce it consistently, long-term.
Here are the steps to determining your “Break-Even” revenue and predicting profits; month-by-month and year-by-year. More than that though, think of this key metric as a break-through process that will take your business to a new level of professionalism and success:
I. The 1st step is to calculate your approximate overhead expenses for the year. Those expenses include any costs that cannot be directly attributed to producing jobs. Therefore, they do not include field labor, payroll expenses (for field employees), sub-contractor expenses, materials, and incidental costs such as equipment rental, porta-jons, dumpsters etc.
Overhead expenses (also known as fixed expenses) include things like administrative wages and related payroll expenses, owners’ salaries, and field supervisor wages (unless these can be directly attributed to an individual job or jobs).
II. These expenses should be derived from the previous year’s tax return and adjusted for the new year. Be sure to consider any projected increases in insurance, rent, and fuel along with any new purchases you anticipate for the coming year.Next, and this will challenge most business owners, you have to decide what your target gross profit percentage will be for the coming year. Gross profit is what’s left after subtracting direct job costs from the total selling price. For more details and step-by-step directions see this “Markup %” document. For an approximate idea of where your gross profit margins should land check out this article.
III. Last, and most important step; divide your total estimated overhead expense amount by your projected gross profit percentage. The result – your break-even revenue goal. That is, the amount of sales your company needs to produce at the desired gross profit percentage, in order to cover your overhead expenses. Read that sentence again – it’s key to the process. Because once you know (and own) these numbers you are off and running with new tools for success. Here are a few examples of how to use them to forecast and predict:
- Divide your annual overhead expense amount by 12 to calculate an approximate monthly budget and therefore take control of costs.
- To determine whether an overhead expense like a new manager, administrative assistant, or software program is justified, determine the annual cost of that investment and divide by the target gross profit percentage. The result is the amount of additional sales revenue you must produce in order to cover these new, unbudgeted costs. This process gives business owners a powerful tool for business decision-making.
- Check your actual vs. estimated gross profit percentage monthly and quarterly. If you’re using QuickBooks or a similar financial management software package, and posting all financial transactions regularly, this will take about 10 seconds. If not, you must start doing that soon. No business can grow without a firm grip on the everyday numbers.
- Add your desired net profit goal (how much money you want to have left over at the end of the year after expenses and paying yourself a salary) to the estimated overhead expenses. Divide this amount by the gross profit percentage to determine your total revenue goal for the year.
- Divide your total annual revenue goal by 12 to derive an approximate monthly revenue goal.
If you are a successful business owner desiring to grow your company to the next new level of professionalism and profitability, this is a tool you cannot afford to overlook. And if you’re feeling overwhelmed or challenged by the thought of tackling these numbers and making sense of them, Legacy Business Leaders is the ally you can’t afford to overlook. Legacy gets results for business owners – positive results that move you and your business forward. Whether your company is a $500,000 or $100,000,000 organization, we exist to be your difference-maker. Contact us today to start the process at 330.470.1300 or email fred@legacybizleaders.com.
Wishing you the best!