“Julia, I have been working hard all year, however, the bottom line is not where I want it to be!”
So here we are – mid October! By now you should have closed your third quarter. Are you where you want to be? Is your focus on having your “touchdown” by December 31st?
All is not lost if your bottom line is looking weak or you are entering a slow 4th quarter. Many small and medium sized companies have not reached their breakeven point yet and will not until mid-November or early December. Keep in mind that once you have reached your breakeven point – daily revenue turns into 100% profit because all expenses for the year have been met by total revenue! So, “IT AIN’T OVER TILL IT’S OVER” and it is not over yet!!
This is the time of year when business owners have to focus on controlling expenses by paying close attention to the financial reports. Brush the dust off the planning documents you did earlier in the year and see if you have done what you said you would do. If you are falling short, get to it! Keep your staff motivated and involved in reaching the goals you set early on. Sound hard? Just remember you have been waiting all year to get to this place. If you have been managing by the numbers there should be no surprises closing the 3rd quarter.
Don’t Throw in the Towel Yet!
All businesses have peak and slow periods. When you master the idea of managing by the numbers you will see the slow periods become less stressful and allow you to continue to focus on your overall profit goals.
If you are approaching a peak business period, make sure you are continuing to monitor all costs. But, if you are approaching a slow business period, make sure you are still continuing to monitor all costs. Notice a trend to my rants! It is all about controlling costs from beginning to end!
What is Breakeven?
Breakeven analysis is used to determine when your business will be able to cover all its expenses and begin to make a profit.The lowest point of profit that a company can achieve and survive is the breakeven point. A company will breakeven when the total sales equal the total expenses. A breakeven calculation is critical for any business owner to understand. It is an activity you can do every month when reviewing your financial reports.
Breakeven is a point in time when revenues and expenses meet. Revenue earned after that point in time becomes pure profit.
Determining the Breakeven Point
To determine the breakeven point you will need total revenue and total expenses for the year from either your forecast or your P&L, and the total number of working days.
Calculating the number of working days:
To calculate your working days, take a 12 month calendar. Mark off any days of the year that you will not be open and then count what is left. The days left are your working days.
Calculating the Breakeven Day:
- Total Revenue / Total Number of Working Days = Daily Revenue
- Total Expenses / Total Number of Working Days = Daily Expenses
- Daily revenue – Daily expenses = Daily Profit.
- Total Expenses / Daily Revenue = Number of Working Days to Breakeven!
- Starting with January 1, count the number of working days to find the actual day of the year you break even.
What does this mean for profit?
Let’s assume every day up to the breakeven point that the company makes a daily profit. Beginning the day after the breakeven point the daily revenue goes directly to profit. This is because your breakeven means you have paid all of your expenses for the entire year. Yes, daily revenue becomes profit because all expenses have been met!
It all comes down to this – The closer you can get the breakeven point to be near Jan 1st, the more profit you will make!
One of the most exciting activities we do in Beyond the Basics Boot Camp is calculating breakeven points. Just knowing the day the revenue and expense axis cross each other is extremely exciting and motivating to most business owners. We are all in business to make a profit, right? Knowing what day your hard work is approaching that touchdown is one of the best motivators! What is your motivation for 4th quarter? Is it to make it to that breakeven day or are you close and ready to focus on shaving a few days to breakeven on an earlier date? Either way – it is motivation to keep your eye on the ball!