break even
DESCRIPTION
Break Even - Why Every Contractor Needs to Know It. Presented to PDCA Residential Forum Advanced Shop Talk on July 16, 2010 in Charleston, SC. How to calculate your break-even point based on annual and monthly budgets How to determine what it takes to make an investment in overhead pay for itself Analyze your situation to determine what costs can be cut to lower your break-even Determine how and when it makes sense to increase your overheadTRANSCRIPT
Break Even Why Every Contractor
Needs to Know It
PDCA Residential ForumAdvanced Shop TalkJuly 16, 2010
Knowing Your Break-Even Point
Critical skill that every painting contractor should have.
At any time, you should be able to quickly analyze your break-even for the year, the month or even the week
Know what number you need to hit to stay profitable (or at least not have a loss!)
What we’ll discuss today
How to calculate your break-even point based on annual and monthly budgets
How to determine what it takes to make an investment in overhead pay for itself
Analyze your situation to determine what costs can be cut to lower your break-even
Determine how and when it makes sense to increase your overhead
Financial Best Practices Accounting system is fully & accurately functioning Controls are in place to ensure accuracy The company has a Budget/Profit Plan for the year Financial Monitoring is up to date and being used
effectively as a business tool Key Metrics are up to date and being used to keep your
finger on the financial pulse of your business Owner reviews Financial Data and Metrics at least
monthly, (if not weekly) and takes action where indicated An adequate credit line is in place The business has a good accountant and banker who
understand and effectively support the business goals Company is profitable, solvent and able to finance its
growth and reward stakeholders
Key Performance Indicators
Factors that indicate the current and future performance of a business in areas that are critical to the company's success.
Financial KPIs Revenue to Budget Gross Profit Net Profit Break Even Sales Current Ratio Debt Ratio Collections (Days Sales Outstanding)
BEST PRACTICE GUIDE : Breakeven Sales
Overhead Expenses*Breakeven Sales = __________________________
Gross Profit Margin
Calculate by week, month, or year to manage your business effectively and keep a positive bottom line
*Include Variable Costs, Overhead Costs and “Other Costs” if critical to business survival
Annual Budget Example
Revenue $500,000
Direct Costs ($275,000) 55%
Gross Profit $225,000 45%
Variable Expenses ($25,000) 5%
Overhead Expenses ($150,000) 30%
Net Operating Profit $50,000 10%
Annual Break-Even Revenue
Variable Expenses $25,000
Overhead Expenses + $150,000
Total Overhead Expenses $175,000
Divided by GP% 45%
Break-Even Revenue $388,889
Monthly Budget Example
Revenue $48,000
Direct Costs ($26,400) 55%
Gross Profit $21,600 45%
Variable Expenses ($2,400) 5%
Overhead Expenses ($14,400) 30%
Net Operating Profit $4,800 10%
Monthly Budget Break-Even
Variable Expenses $2,400
Overhead Expenses $14,400
Total $16,800
Divided by GP% 45%
Break-Even Revenue $37,333
Calculating Break-Even Hours
Monthly Budget $48,000 Based on 6 painters @ 160 hours each Total Budget Hours 960 Projected Sales Price per hour $50 (including
materials) If Break-Even Revenue is $37,333 Break-Even Hours are 747 for month
(approx 174 hours per week)
What about other expenses?
Take into account other expenses that don’t hit the Profit and LossOwner Draws/Loans to ShareholdersLoan PaymentsCredit Card Payments not included in monthly
operating expenses
Changed Break-Even
Variable Expenses $2,400
Overhead Expenses $14,400
Vehicle Loan $750
Total $17,550
Divided by GP% 45%
Break-Even Revenue $39,000 Break-Even Hours are now 780 for the month
What if your GP% decreases?
Variable Expenses $2,400
Overhead Expenses $14,400
Vehicle Loan $750
Total $17,550
Divided by GP% 40%
Break-Even Revenue $43,875 Break-Even just increased by almost $5,000!
Using Break-Even Analysis to Add Infrastructure
How much more revenue do you need for new overhead to at least pay for itself?
Adding a new overhead positionSales Salary $40,000
Payroll Tax/WC $5,200
Benefits $3,900
Vehicle Expense $6,000
Cell Phone $600
Total $55,700
Divided by GP% 45%
Break-Even $123,778
When to lower Break-Even
Consistently not meeting monthly budgets Trending lack of sales or hours to hit
monthly break-even Projection for Year shows a loss
Ways to Reduce Break-Even
Increase Gross Profit Margin Increase Productivity Raise Prices Reduce Direct Costs
Reduce Variable Costs Reduce Vehicle Expenses Reduce Benefits
Reduce Overhead Costs Reduce or eliminate
discretionary overhead costs
Re-negotiate with vendors Reduce wages or hours of
overhead personnel Eliminate overhead
positions Relocate to less expensive
office
Enlist the team in helping you find ways reduce costs & gain efficiency!
Operational Steps Keep variable costs down (equal or
below the average % or prior year % ) Reduce overhead costs to fit with
reduced revenue (while keeping an eye on your future plan)
Achieve greater productivity from resources which are supported by overhead costs
Ensure that tight control is exercised over assets
Operational Steps – the first round Challenge the team to be more productive in the
field and the office Training Incentives Coaching
Re-negotiate with vendors on pricing or payment terms
Cut out “nice to have” costs that don’t add to the top or bottom line
Tighten up on wasteful or thoughtless spending Engage the team in saving money on expenses
Operational Steps – the next round Look at reducing 3 of your largest costs
and evaluate the pros and cons: Labor- Should you downsize? Rent – Should you move? Marketing – Should you slash your
marketing budget?
When to Increase Overhead
Need more leads to hit revenue targets or keep crews booked with work
Current overhead personnel can’t take advantage of opportunities to grow the business
Business is in growth mode
Increasing Costs can raise your Break-Even (in a good way) Lower Gross Profit Margin
Raise wages or hire more expensive (more competent) workers Use better materials
Add Overhead Infrastructure Add Overhead personnel
Increase Advertising/Marketing Costs Attract higher functioning team members
Add benefits Increase wages/salaries
Increase capacity Bigger shop/office Purchase Vehicles or equipment Add a spray booth
Stay on top of Break-Even Update Projection Monthly Focus on Marketing Activities Focus on Productivity on Jobs Keep Revenue and Hours targets top of
mind Implement weekly management & sales
meetings for accountability Stay informed with continuous monitoring Take action quickly when indicated
Knowledge is power
Knowing your numbers and learning how even small but timely changes affect your profitability increase your opportunities for success in any economy.
Contact us to help get your business On Target for success in 2010!
Advisors On TargetLinnea BlairOffice: 619.291.3700Email: [email protected]: AdvisorsOnTarget.comTwitter: AdvisorOnTargetFacebook:facebook.com/AdvisorsOnTargetLinkedIn:linkedin.com/in/linneablair