Growth is undoubtedly back on the agenda for the building and construction industry. In our Managing Growth article last month one of our tips was to know your break-even point. If you understand this number it will assist you in setting both revenue and profitability targets.
Whether you are struggling to make a profit or are experiencing growth, a simple break-even analysis provides you with a clear target for your sales team to work towards. It also gives you a better feel for where your business is at based on your level of activity during the month. Best of all, it’s very easy to calculate. For example:
Here are our top tips for staying on top of your break-even point in the building and construction industry:
Stay on top as things change
Your business is constantly evolving and changing as you react to different business challenges. This means that your margins and overhead costs are always changing [especially if your business is growing].
To keep your break-even amount relevant you must constantly recalculate it to reflect the changes occurring in your business [or you run the risk of being too slow to react]. For a growing business this may require a monthly calculation with forward forecasting up to 12 months in advance. This will ensure everyone in the business knows what is required from a sales perspective before it’s too late.
The industry faces many ongoing challenges, one of which is the seasonality of revenue. This is largely due to time lost over Christmas and increased wet weather over summer months. So how do you avoid being disappointed when your turnover during this period does not reach your break-even target?
Try considering your break-even point on an annual basis and then flex your monthly targets to more realistic levels based on your expected activity. For instance, your annual sales required to break-even may be $12 million. Instead of allocating this amount equally over the 12 months you may allocate $1.1 million to the months from February to November leaving $500,000 each to December and January. You are still targeting annual sales of $12 million but in a more achievable way. Better still, you won’t be left with a false sense of security for most of the calendar year.
Break-even is an inward-looking tool which helps guide your decision making. With this in mind, your estimated overhead costs and margin must be realistic otherwise the end result is going to be well off the mark. This, in turn, leads to bad decision making [particularly where you have under-estimated your break-even point].
[Don’t forget to take account of a real commercial wage to you, the owner]
‘Overheads’ doesn’t have to be a dirty word
Often every increase in costs can be seen as an overhead that increases your break-even point requiring more sales to be contributed. But what if those same overheads could actually assist you in lowering your break-even at the same time?
A case in point can be the staff in your business, your most important resource. Let’s consider some of the different types:
- Estimating – maybe they can find more margin in the same jobs by locating savings in the product mix. Maybe your margins aren’t as accurate as they should be and you are losing margin unexpectedly.
- Accounting – maybe they can assist with eliminating waste in the business bringing your overhead down. Better forecasting might also mean better decisions will be made that impact on profitability.
Maybe now is a good time to consider something each key person in your business could contribute to improving your profitability.
[Unleash the potential of your most important resource, your staff – no owner can do it on their own]
Take it a step further
Having a business that breaks even is a great start, but what about when you want to go beyond that? Simple, add your desired pre-tax profit to your overhead costs. Divide this amount by your estimated margin and that’s the turnover you require to achieve your desired profit. This is great to see if you are on track to make the profit you think you are going to make or want to make.
Why not take your break-even tool from an inward-looking management tool to a business strategy tool by running a ‘what-if’ analysis. For instance, if you increase your margins by 1%, how does this impact on your required turnover? Alternatively, if you can cut your overhead costs by 3% how will this affect your required turnover? You very quickly discover how small changes to these amounts have a big impact on your turnover requirements.
Making sales is great for business but if you don’t know how much you need to sell to make a profit, you are flying blind. This simple tool can provide your business with the direction it needs to succeed.