The Joy of Budgeting and Breakeven #1
Dec 30, 2015
Guest Blog By: David Romano, Benchmarkinc Founder
The holiday season is filled with such special moments, such as the smile on the face of your children as they open the most perfect Christmas presents, and the awesome kiss you get from the one you love on New Year’s Eve! With all of those wonderful events comes the proverbial reality smack on the face for many entrepreneurs – it is also time to plan for next year by building a budget and determining breakeven (the killer B’s).
For many restoration owners, this activity is deemed either unnecessary or uncomfortable because they either feel like they are in such control of the business (which is never true), or it is so hard to do that they would rather just plod along as usual and be content with the ebbs and flows of the year. Now for those that are truly driven to win, creating budgets and determining breakeven is just as rewarding as the most special holiday events.
Creating budgets sets the stage for what you believe is winning in your business and builds the guidelines for which your team should operate within. I ask all of you who do not create budgets, “How do you know if your business is doing well if you didn’t even define what good looks like” and “How are you going to hold your team accountable when they don’t even know what is expected?” Going into an NFL game without a playbook would tag your team as one destined to fail, right? So isn’t that the same thing for your business?
Breakeven tells you what your business has to generate, at its current gross profit level, to not lose or make money. This number must be closely monitored, because if expenses are added or decreased and/or the gross profit changes, so will the breakeven. This number should be top of mind and at all times and must be the catalyst for all sales efforts. Staying below this number for a prolonged period of time will highlight a business that may not be sustainable. Additionally, once breakeven is achieved the rest is pretty much gravy because all of your fixed expenses are covered; and after variable expenses are paid, all that remains flows to the bottom line.
As a New Year’s resolution, make it a priority to build that budget and calculate your breakeven. You owe it to yourself, your staff and your business. Vince Lombardi once said, “The quality of a person’s life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.” This is as true in football as it should be in your business. Happy Budgeting!
The Joy of Budgeting and Breakeven #2
Jan 5, 2016
Guest Blog By: David Romano, Benchmarkinc Founder
News flash: You don’t need an MBA to build a robust budget and calculate breakeven. When broken down into small bit size chunks it is actually pretty simple. One caution is not sweat the small stuff because trying to figure out if the utilities should be .5% or .51% of sales won’t make enough difference to waste time being to analytical. Additionally, hiring or acting like an economist who graduated from MIT when building a sales forecast is also an exercise in frustration with not much return. Here are the simple steps:
- Build a historical picture of sales and expenses
- Most would tell say that you need at least five years but with the volatility of the industry three years should suffice
- This will provide the framework to determine your variable expenses such as cost of goods sold and other operating expenses such as vehicle gas and maintenance, office supplies, utilities, etc.
- It will also map out your sales curve that will be used to spread out the projected increase or decrease in sales
- Spend no more than an hour determining if the next year is going to be better or worse in sales volume
- You may also want to determine the mix of business (mitigation, reconstruction, contents, new construction, etc.) to make necessary adjustment to your cost of goods sold
- Plug your projected sales into your sales curve to properly spread out the volume throughout the months
- Once you have determined the volume now use the historical expense percentages to build your operating costs
- It is easiest to treat all expenses as variable until you complete the next step
- Calculate your fixed expenses such as salaries, occupancy expense, insurance, and advertising; yes, advertising should be a fixed expense because you should have planned this out for each month as well
- Override all of the pre-calculated lines of the budget with these fixed numbers
- Say a prayer, cross your fingers, and hope that what you outlined is going to show a profit
- Meet with the key members of your team and fill them in on the financial plan and ensure everyone is on the same page and agrees what you set is achievable
Now that we got that out of the way there is one task left – calculating breakeven. Many of us consultants like to overcomplicate things to make us look more important to the success of your business and a breakeven calculation is one of the areas we tend over engineer. There are two simple calculations, that will get you very close to the over-engineered versions.
The first is what I call the Operating Breakeven, the amount of sales required for a company to breakeven on paper. OPERATING BREAKEVEN = TOTAL OPERATING EXPENSE $’S / GROSS PROFIT %. If you have $1,000,000 in operating expenses and your gross profit is 36% then your operating breakeven is $2,777,778. The second calculation I term Cash Breakeven and it is even more important than the first because it forecasts the amount of sales required to produce enough cash to operate. CASH BREAKEVEN = TOTAL OPERATING EXPENSE $’S + CASH REQUIREMENT FROM BALANCE SHEET / GROSS PROFIT. If you have $1,000,000 in operating expenses, and principle payments to loans that equal $100,000 per year, and your gross profit is 36% your cash breakeven is $3,055,556. Big difference right?