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 break-even point
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
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 Loss • Owner Draws/Loans to Shareholders • Loan Payments • Credit Card Payments not included in monthly operating expenses
Changed Break-Even Break-Even Hours are now 780 for the month
What if your GP% decreases? 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?
Reducing Your Break-Even Point • Consistently not meeting monthly budgets • Trending lack of sales or hours to hit monthly break-even • Projection for Year shows a loss
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 What Can Reduce Break-Even? • 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?
Increasing Your Cost Structure(and therefore your Break-Even Point) • 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
What might Increase Break-Even? • 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 your profitability • 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.
4 Free Things You Can Do Today • Go to AdvisorsOnTarget.com and Sign Up for our Email Updates • Click On Member Portal and Sign up as a Free Member to have access to our Free Tools including today’s handout • Go to Facebook and “Like” our Business Page at facebook.com/AdvisorsOnTarget • Follow us on Twitter at AdvisorOnTarget If you need more help with a budget/profit plan for your business just give me a call at 619.291.3700
Contact us to help get your business On Target for success in 2011! Advisors On Target Linnea Blair Office: 619.291.3700 Email: Lblair@AdvisorsOnTarget.com Web: AdvisorsOnTarget.com Twitter: AdvisorOnTarget Facebook:facebook.com/AdvisorsOnTarget LinkedIn:linkedin.com/in/linneablair