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Using The Break-Even Analysis Year Round

Oct 25, 2018 1:50:49 PM

Most employees probably think their Dealer-Owners are getting rich in this business. Why else would your company need to charge such high prices for a kitchen or bath, right? Now imagine your employees’ response to the news that your company won’t earn Dollar One in Net Profit until it completes $781,277 in projects. That should get their attention!

Indeed, it has been SEN's experience that this astonishing fact will give your staff a vigorous new respect for your firm’s bottom line needs. Design Assistants put more detail in their drawings.  Estimators are more precise in their calculations. Sales people work a little harder in securing the highest price possible (particularly with demanding customers that will require a lot of hand-holding). And Project Managers get subs to perform more efficiently so projects are completed as much on schedule as possible.

Of course, the information needs to be presented and used properly. Without producing the budgeted $1,000,000 in business (at the projected Gross Profit Margin), there won’t be any Net Profit to finance the new truck and computers that are needed. There won’t be any Net Profit to pay for the 15% expected increase in Health Insurance, forcing the company to cut back on these benefits. And there won’t be any Net Profit to fund a future Retirement Program that everyone seems to want. All because the company’s budgeted Net Profit isn’t made until the final $218,723 worth of contracts are satisfactorily completed and invoiced.

Now, Weekly Production Meetings can have a real focus. With the jobs underway, how many will be able to be invoiced by the end of the month? Will the firm achieve the $65,106 monthly Break-even Point in revenue? Will the Owner be in position to spread around some praise?

And now, Quarterly Management Review Meetings can have an additional focus. Based upon the company’s cumulative financial performance to date, has the Break-even Point changed at all? Will it be a little lower because the Contribution Ratio came out higher than budgeted? What will the new Monthly Break-even Goal be for the staff over the next quarter?

Projecting Year-end Net Profit

By the time October rolls around, Owners can make good use of another application for the Break-even Point. By accurately projecting the Year-end Net Profit based upon 9-month figures, your accountant can get a head start on effective tax planning. Here’s how it can be accomplished for the sample operation featured earlier:

  1. Project Year-end Income (based upon un-billed Sales Orders)                $1,051,000
  1. Subtract 12-month Break-even Point (based upon 9-month results)        - $802,200
  1. Overage                                                                                                        $248,800           
  1. Multiply by CM Ratio (based upon 9-month results)                                       x .3526      
  1. Projected Pre-Tax Net Profit (based upon 9-month results)                         $87,726 

The result is about 17% more than the original budgeted Net Profit of $75,000. One tax-planning strategy might be to reduce the corporate Net Profit below $50,000 where the payment to Uncle Sam is only 15%. A good accountant can consult with you on a menu of options to achieve this objective … but only if you have a good command of Break-even Analysis and what it can accomplish for you.

For more information on this, and other business finance topics, reach out to one of SEN's industry-specific business coaches today! 

Topics: Finances