1 Breakeven Point
As a business owner, you’re in business to generate a profit! But before you make just a dollar of profit, have you calculated how much product/services you need to sell in order to keep the doors open, and just break even? The breakeven point is the point at which a business generates enough sales/revenue to simply cover its total costs and therefore break even. Many business owners do not understand fully the breakeven point and tend not to remain in business very long as a consequence. In simple terms the breakeven formula is:
Fixed Costs divided by Gross Profit Percentage
Fixed Costs are those costs that exist independently of sales: they are not proportional to nor caused by sales. Typically, fixed costs are constant in price and ongoing in nature, such as indirect labour, rent, loan repayments, payroll tax, insurance, etc.
Gross Profit/Percentage is the the sales less variable costs expressed as a percentage of sales.
Variable Costs are those costs that vary with output or sales. That is, these costs are typically caused by or are influenced by sales. These include direct labour, inventory, materials used in production, etc.
Most advisors who deal with businesses are aware of the importance of the breakeven point and how it should be calculated. Breakeven analysis is a great tool for managing and controlling costs, as well as utilising it as a decision tool to assist in setting prices or determining what volumes of sales might be needed to break even. If you don’t know your breakeven point, it makes it more difficult to set prices for your products/services, or to determine the volumes of sales required to be profitable, and hence the chances of business failure increase significantly.
2 Cashflow Projection
The old adage that “cash is king” still rings true. Whether it be suppliers, the Tax Office, employee wages, the landlord or insurance, you need cash on hand at all times in order to pay your bills.
With many studies suggesting that cashflow is one of the leading causes of small business failure, it’s imperative to prepare with your accountant or bookkeeper a cashflow forecast. A cashflow forecast tracks the sources and amounts of cash coming into and out of your business over a given period. It allows you to foresee peaks and troughs, and therefore whether you have sufficient cash on hand to discharge your debts at a given time. This is turn alerts you to when you may need to take action – by discounting stock or getting an overdraft for example – to make certain that your business has sufficient cash to meet its needs. The forecast also allows you to foresee when you have large cash surpluses which may indicate you have borrowed too much or have money that ought to be ploughed back into your business.
Approach your advisors and, in consultation with them, prepare a detailed cashflow forecast.