Break Even
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The document discusses the importance of contractors understanding their break-even point and how to calculate it. It provides examples of annual and monthly budgets, showing how to determine break-even revenue, sales, and hours. It also discusses how changing variables like overhead costs, gross profit margins, or adding new expenses can impact break-even levels. The document recommends contractors regularly monitor their break-even and take action if they are not hitting monthly targets.
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Break Even
- 1. Break Even Why Every Contractor Needs to Know It PDCA Residential Forum Advanced Shop Talk July 16, 2010
- 5. Key Performance Indicators Factors that indicate the current and future performance of a business in areas that are critical to the company's success.
- 8. Annual Budget Example 10% $50,000 Net Operating Profit 30% ($150,000) Overhead Expenses 5% ($25,000) Variable Expenses 45% $225,000 Gross Profit 55% ($275,000) Direct Costs $500,000 Revenue
- 9. Annual Break-Even Revenue $388,889 Break-Even Revenue 45% Divided by GP% $175,000 Total Overhead Expenses + $150,000 Overhead Expenses $25,000 Variable Expenses
- 10. Monthly Budget Example 10% $4,800 Net Operating Profit 30% ($14,400) Overhead Expenses 5% ($2,400) Variable Expenses 45% $21,600 Gross Profit 55% ($26,400) Direct Costs $48,000 Revenue
- 11. Monthly Budget Break-Even $37,333 Break-Even Revenue 45% Divided by GP% $16,800 Total $14,400 Overhead Expenses $2,400 Variable Expenses
- 14. Changed Break-Even Break-Even Hours are now 780 for the month $39,000 Break-Even Revenue 45% Divided by GP% $17,550 Total $750 Vehicle Loan $14,400 Overhead Expenses $2,400 Variable Expenses
- 15. What if your GP% decreases? Break-Even just increased by almost $5,000! $43,875 Break-Even Revenue 40% Divided by GP% $17,550 Total $750 Vehicle Loan $14,400 Overhead Expenses $2,400 Variable Expenses
- 16. Using Break-Even Analysis to Add Infrastructure How much more revenue do you need for new overhead to at least pay for itself?
- 17. Adding a new overhead position $123,778 Break-Even 45% Divided by GP% $55,700 Total $600 Cell Phone $6,000 Vehicle Expense $3,900 Benefits $5,200 Payroll Tax/WC $40,000 Sales Salary
Editor's Notes
- So, coming back to our topic, what is the main financial responsibility of management and what do these key financial indicators have to do with it? In broad outline, the function of management is to: Increase sales revenue by increasing price and/or volume While… Keeping variable costs down (at least equal to or below the rate of increase in revenue) And… Achieving greater productivity from the resources which are financed through overheads And… Ensuring that tight control is exercised over assets (in particular stock and debtors) So that… CASH FLOW INCREASES SIMULTANEOUSLY WITH THE INCREASE IN NET PROFIT.