Your business may be busy, busy, busy. You feel good! Your customers love you and love your service levels. Your order book is full – indeed you could have more orders than you can handle. But just because you are the owner of a busy SME doesn’t necessarily mean you are the owner of a profitable one. How do you know if your company is really making money? Specifically, how do you know the point below which you will definitely be losing money, in other words, your break-even point?
Don’t leave it too late to know your break-even point!
It’s a question that is rarely asked before it’s too late to do something about it, when your business is hemorrhaging money. In a nutshell, your business ‘break-even’ point is when revenue equals its total costs or expenses. Above that, you make a profit. Below that, you are losing money. All too often, many small business owners simply rely on their own intuition about the state of their finances, rather than reviewing what is really going on. The result: your hands start to slip from the bar – you begin to sink below your break-even point, and the trickle of cash outflow becomes a flood, with business failure staring you in the face.
Take action now on your break-even point!
So what can you do? Here are a few (of many) simple tips:
• Keep your finances under regular review by having management accounts prepared, preferably by a professional accountant, who is a good communicator, and believes in ‘demistifying’ the numbers and presenting them in a common sense manner so you can quickly take corrective action.
• Have a rolling (minimum – three months) cash flow forecast prepared, which highlights any dips in cash reserves. Once forewarned, you can take action, for example, by deferring capital expenditure, negotiating payment timings with key suppliers, or offering discounts to customers to speed up cash collection.
• Review your overheads. These are generally costs which do not relate directly to the products you make or the services you provide. Some are fixed, but some do vary, such as gas, water, electricity, telecommunications and waste disposal. Consider deploying a professional to review these overhead costs and suggest savings through supplier switch, as well as identifying efficiency savings. The cost of such an exercise is often much lower than you might think, is more than paid for by the savings achieved, and can often be achieved at no cost at all. The key benefit of reducing this aspect of your costs, is that you lower your break-even point. That bar becomes easier to reach!
• Review your quotation and pricing policy. Are you building into your selling prices all the costs that are directly relevant to the products you make? Do you know what your ‘gross profit’ is (the difference between your selling price and your direct costs)? Are you tracking all the time your staff spend on providing the services you invoice to your customers? Such an exercise can be very revealing!
Enjoy your business!
Don’t be a ‘busy fool’. Be busy for the right reasons, confident that you know when you are making money, which could just mean you could plan and achieve your business growth more easily. You could even make more money without being so busy, and spend more time on what you enjoy the most about your business and recapture the joy and freedom you once felt when you where that enthusiastic business start-up. If you would like to talk about your break-even point, and how to drive it down, please give me a call on 07774 548822 or email me at email@example.com.