Do you know? If not, why not? It’s akin to driving a car and falling asleep at the wheel – disaster looms ahead. If you know how much it costs to cover all of your expenses in any given month, then you know:
- The minimal amount of sales you need to make to keep everything going.
- How much cash reserves you need to operate for a few months without achieving the minimal sales goal.
- You can look at any variances in your sales and know quickly if you have to start cutting expenses or if you have excess to invest.
- How much to request to the bank for an operating line of credit as a safeguard for a slow month.
These are just a couple of valuable decision-making information that comes from knowing your breakeven point.
Do you Know How to Calculate Your Break-even point?
This can get more complicated depending on your business model, but the first thing to do is to add up all of the expenses that have to be paid each month whether you sell $10.00 or $100,000.00. At a minimum, you need cash flow to pay these fixed expenses. This includes payroll, taxes, rent, utilities, loan payments, etc.
Cash Flow Compared to Profits
We may sell a lot, but if we sell on credit and those we sell to do not pay us, we do not have the cash to pay for the expenses that we have identified above. If you sell on credit and there is a 10 day or 30 day lag time in getting paid, you have to watch this very carefully. If other businesses are having problems paying their bills and they stop paying you on time, you need to sell more to cover it or you need to put more aggressive collection processes in place to get your receivables coming in on the schedule that you are used to.
Why You Need to Figure this out Quickly and Pay Attention Regularly
If we don’t understand these base numbers in our business we can quickly see our business go from doing great to “burning the furniture” in a matter of months. Most of us small business owners do not realize how quickly the expenses add up when you have even 4 or 5 employees, a lease, utilities, etc. With just these basics our business can quickly require $20,000 – $30,000 a month just to cover the bills. (Obviously, a slightly larger organization can quickly double this.) Yet, how many of us have $60,000-$100,000 in cash reserves in case we have 3-4 really bad months. Not to mention if we have a product or service that requires up front investment from us in materials or inventory. This $100,000.00 that had us feeling rich for the moment, can drop down very quickly and put us in a position to start cutting deeply into our expense structure.
Business Don’t Grow by Deeply Cutting Costs
If we find ourselves at the point where we are having to lay off employees, reduce inventories, limit marketing we may be able to reduce costs enough to hang on a few more months. But I don’t think that is ever our goal. We all go into business wanting to make a difference. We want to create a secure environment for our employees and our families. We want our customers to always receive the best value and quality for our goods and services. Once we go into the deep cutting stage we begin to lose these elements.
It’s All About Stewardship
It’s just good stewardship. If we remember that all of this is God’s and He has given it to us to watch over, then it is our responsibility to be on top of the information, making necessary changes as we go along, and ensuring that we are using the resources we have to glorify God to the best of our abilities.
Will stuff still happen? Of course. We may still hit rough waters. We may not be able to make the equation work. It could be timing… it could be the industry we are in… it could be the economy… All I am proposing is to NOT have it be because we didn’t KNOW. Because we put our head in the sand and just came in each day and operated without the roadmap that is available to all of us. We don’t need a fancy system. We don’t need a high powered computer. My father-in-law, a retired Senior Tax Accountant, always used a #2 pencil and a green ledger pad. We can figure it out close enough with paper and pencil.
Is This Helpful?
For some of you this may be really basic. I hope so. But I know most of us started as technicians or professionals, not business managers. It is my heart that Louisiana Small Businesses stay strong and lead our economy back to health. Please visit my blog at www.suemiley.com for frequent follow-ups to this post on various topics that will hopefully add ideas to your business to maintain stability and growth during this economy. My prayer is that for most of us it is a time that we can actually re-invent our businesses as we are small and nimble and the big companies are really hurting in this economy too! But they have the large MARKET SHARE to lose to US!!
If you have specific questions or topics you would like to see covered, please place your questions in the comment sections. I will respond to them all, but hopefully we will get the benefit of other readers on what has worked for them too!