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Welcome to the Webinar Understanding your Break Even Point
Break Even: Why do I need to know my Break Even Point? 3MAC Week 3 Page 6
Why do I need to know? Here are some example decisions that you need to make, where having a knowledge of Break Even is VITAL: Are we operating profitably? What is the minimum sales we need to make each day, each month, to make it worth opening our doors? Are we selling at the right price? Or should we be discounting? Or putting our prices up? Are our staff operating efficiently? Are we managing them in such a way that there is a decent return on their time? Will we be able to get out of debt? Will we be Cash Flow positive? Will we be generating Cash? Why do businesses go broke? Because they are not generating sufficient surplus cash to fuel business development. Can I afford this new piece of capital equipment? Should I purchase it outright, or finance it? Have I provided for my income tax obligations? This is a vital piece of information for driving your business forward!
Break Even: What is the difference between SBM and SBE? During this week we refer to both. Sustainable Business Model (SBM) this was used at the seminars to demonstrate a quick method of checking the sustainability of the financial model that the business has. It can be used to check the efficiency of the financial management in the business. Survival Break Even (SBE) this is a business planning tool (formula) that is used to arrive at the minimum sales figure that the business needs to achieve so that the business is producing positive revenue. 3MAC Week 3
Break Even: Survival Break Even Sales is the level of sales you require, at a predetermined GP%, to cover: COGS Overhead Expenses Loan Repayments Tax Owners Remuneration 3MAC Week 3 Page 6
Break Even: This graph shows Break Even Sales being reached: 3MAC Week 3 Page 6
Break Even: This graph shows costs that we have to pay, whether we make a sale or not: 3MAC Week 3 Page 6
Break Even: Now we can add the sales line 3MAC Week 3 Page 6
Break Even: This graph shows Break Even Sales being reached: 3MAC Week 3 Page 6
Break Even: This graph shows Break Even Sales being reached: What is happening at this point? 1. Fixed overheads and COGS are paid for 2. Variable COGS are paid for 3. Tax is paid on profits 4. Loan Repayments are paid for 5. Owners receive remuneration 3MAC Week 3 Page 6
UBTA Sales & Equity Tracker (SET)
Sustainable Business Model: Are you in the dark as to business targets? Many businesses have gone broke because the business owner and management team failed to understand what sales where required to ensure prosperity. introducing: The SBM formula! 3MAC Week 3 Page 7
Sustainable Business Model: The SBM formula: Wages (Incl Owners Remuneration) Extra Employment Expenses Total Employment Cost Other Operating Costs TOTAL Occupancy Costs TOTAL COMMITMENTS Divide by GP% Double That (Target) = 3MAC Week 3 Page 7 $ 600,000. 120,000 720,000. 360,000 $ 1,080,000. 220,000 1,300,000 @33.3% = $3.9M $ 7.8 Million
UBTA SBM Tool
Fixed & Variable Costs: As sales increase, variable costs increase but fixed costs do not. 3MAC Week 3 Page 9
Fixed & Variable Costs: As sales increase, variable costs increase but fixed costs do not. SALES FIXED COGS VARIABLE COGS TOTAL COGS GROSS PROFIT 25,000 25,000 10,000 35,000 Loss 10,000 50,000 25,000 20,000 45,000 Profit! 5,000 75,000 25,000 30,000 55,000 20,000 100,000 25,000 40,000 65,000 35,000 3MAC Week 3 Page 9
Fixed & Variable Costs: In the real world fixed costs usually are only fixed to a certain level, and then they step up: 3MAC Week 3 Page 9
Fixed & Variable Costs: As sales increase, variable costs increase but fixed costs do not. SALES FIXED COGS VARIABLE COGS TOTAL COGS GROSS PROFIT 25,000 25,000 10,000 35,000 Loss 10,000 50,000 25,000 20,000 45,000 Profit! 5,000 75,000 25,000 30,000 55,000 20,000 100,000 25,000 40,000 65,000 35,000 125,000 50,000 50,000 100,000 25,000 150,000 50,000 60,000 110,000 40,000 175,000 50,000 70,000 120,000 55,000 200,000 50,000 80,000 130,000 70,000 3MAC Week 3 Page 9
Survival Break Even: The SBES formula: A. Owners Drawings (no tax) B. Loan Principal repayments (min) C. Sub-total (ie Target NPAT) D. NPAT divided by (1 Tax Rate) = Target NP E. Add Overhead Expenses F. Equals Target Gross Profit G. Divide by GP% H. Equals SBES SBES x 1.5 = IBES $ 80,000. 25,000. 105,000.. 140,000. 250,000.. 390,000. 35% $ 1,114,285 $ 1,671,428 3MAC Week 3 Page 10 & 11
Unit Break Even: How many units do we need to sell to cover fixed costs? 3MAC Week 3 Page 24
Unit Break Even: Unit Break Even Analysis: i. Target Sale Price per Unit ii. Variable Cost per Unit iii. Contribution Margin per Unit iv. Total Fixed Costs v. Fixed costs Contribution Margin $ 75.00. 27.50 47.50. 50,000... 1052.63 ROUNDUP!!! 1053 3MAC Week 3 Page 24
10% Price Rise: Unit Break Even Analysis: i. Target Sale Price per Unit ($75 x 1.1) ii. Variable Cost per Unit iii. Contribution Margin per Unit iv. Total Fixed Costs v. Fixed costs Contribution Margin $ 82.50. 27.50 55.00. 50,000... 909.09 ROUNDUP!!! 910 143 less units! 3MAC Week 3 Page 25
10% Discount: Unit Break Even Analysis: i. Target Sale Price per Unit ($75 x 0.9) ii. Variable Cost per Unit iii. Contribution Margin per Unit iv. Total Fixed Costs v. Fixed costs Contribution Margin $ 67.50. 27.50 40.00. 50,000... 1250.0 1250 197 more units! 3MAC Week 3 Page 25
Break Even Units: Download your copy of the tool (subscribers only): 3MAC Week 3 Page 27
Management Decisions: Other example management decisions involving Break Even: Should we employ this extra staff member? If we decreased selling prices 5%, what extra sales would we need to obtain to still break even? Because we have $450,000 of Fixed COGS, we found we could decrease selling prices 10%, which increased our sales 35%, and our GP% went from 40% to 43%!!! 3MAC Week 3 Page 28
Improving your GP: If you have a low Gross profit percentage, use the checklist on Page 37 for some things you can do to improve it: 3MAC Week 3 Page 37
7 Profit Drivers: Listen to the information video on how to increase Profits & Cash 3MAC Week 3 Page 35-38
7 Profit Drivers: Listen to the information video on how to increase Profits & Cash
Any Questions?
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