Break Even Why Every Contractor

Needs to Know It

Knowing Your Break-Even Point

Critical skill that every painting contractor should have.

At any time, you should be able to quickly analyze your break-even for the year, the month or even the week

Know what number you need to hit to stay profitable (or at least not have a loss!)

What we’ll discuss today

How to calculate your break-even point based on annual and monthly budgets

How to determine what it takes to make an investment in overhead pay for itself

Analyze your situation to determine what costs can be cut to lower your break-even

Determine how and when it makes sense to increase your break-even point

Financial Best Practices Accounting system is fully & accurately functioning Controls are in place to ensure accuracy The company has a Budget/Profit Plan for the year Financial Monitoring is up to date and being used

effectively as a business tool Key Metrics are up to date and being used to keep your

finger on the financial pulse of your business Owner reviews Financial Data and Metrics at least

monthly, (if not weekly) and takes action where indicated An adequate credit line is in place The business has a good accountant and banker who

understand and effectively support the business goals Company is profitable, solvent and able to finance its

growth and reward stakeholders

Key Performance Indicators

Factors that indicate the current and future performance of a business in areas that are critical to the company's success.

Financial KPIs Revenue to Budget Gross Profit Net Profit Break Even Sales Current Ratio Debt Ratio Collections (Days Sales Outstanding)

BEST PRACTICE GUIDE : Breakeven Sales

Overhead Expenses*Breakeven Sales = __________________________

Gross Profit Margin

Calculate by week, month, or year to manage your business effectively and keep a positive bottom line

*Include Variable Costs, Overhead Costs and “Other Costs” if critical to business survival

Annual Budget Example

Revenue $500,000

Direct Costs ($275,000) 55%

Gross Profit $225,000 45%

Variable Expenses ($25,000) 5%

Overhead Expenses ($150,000) 30%

Net Operating Profit $50,000 10%

Annual Break-Even Revenue

Variable Expenses $25,000

Overhead Expenses + $150,000

Total Overhead Expenses $175,000

Divided by GP% 45%

Break-Even Revenue $388,889

Monthly Budget Example

Revenue $48,000Direct Costs ($26,400) 55%Gross Profit $21,600 45%Variable Expenses ($2,400) 5%Overhead Expenses ($14,400) 30%Net Operating Profit $4,800 10%

Monthly Budget Break-Even

Variable Expenses $2,400

Overhead Expenses $14,400

Total $16,800

Divided by GP% 45%

Break-Even Revenue $37,333

Calculating Break-Even Hours

Monthly Budget $48,000 Based on 6 painters @ 160 hours each Total Budget Hours 960 Projected Sales Price per hour $50 (including

materials) If Break-Even Revenue is $37,333 Break-Even Hours are 747 for month

(approx 174 hours per week)

What about other expenses?

Take into account other expenses that don’t hit the Profit and LossOwner Draws/Loans to ShareholdersLoan PaymentsCredit Card Payments not included in monthly

operating expenses

Changed Break-Even

Variable Expenses $2,400

Overhead Expenses $14,400

Vehicle Loan $750

Total $17,550

Divided by GP% 45%

Break-Even Revenue $39,000 Break-Even Hours are now 780 for the month

What if your GP% decreases?

Variable Expenses $2,400

Overhead Expenses $14,400

Vehicle Loan $750

Total $17,550

Divided by GP% 40%

Break-Even Revenue $43,875 Break-Even just increased by almost $5,000!

Time for an exercise

Using Break-Even Analysis to Add Infrastructure

How much more revenue do you need for new overhead to at least pay for itself?

Adding a new overhead positionSales Salary $40,000Payroll Tax/WC $5,200Benefits $3,900Vehicle Expense $6,000Cell Phone $600Total $55,700Divided by GP% 45%Break-Even $123,778

Reducing Your Break-Even Point

Consistently not meeting monthly budgets Trending lack of sales or hours to hit

monthly break-even Projection for Year shows a loss

What Can Reduce Break-Even?

Increase Gross Profit Margin Increase Productivity Raise Prices Reduce Direct Costs

Reduce Variable Costs Reduce Vehicle Expenses Reduce Benefits

Reduce Overhead Costs Reduce or eliminate

discretionary overhead costs

Re-negotiate with vendors Reduce wages or hours of

overhead personnel Eliminate overhead

positions Relocate to less expensive

office

Enlist the team in helping you find ways reduce costs & gain efficiency!

Operational Steps Keep variable costs down (equal or

below the average % or prior year % ) Reduce overhead costs to fit with

reduced revenue (while keeping an eye on your future plan)

Achieve greater productivity from resources which are supported by overhead costs

Ensure that tight control is exercised over assets

Operational Steps – the first round Challenge the team to be more productive in the

field and the office Training Incentives Coaching

Re-negotiate with vendors on pricing or payment terms

Cut out “nice to have” costs that don’t add to the top or bottom line

Tighten up on wasteful or thoughtless spending Engage the team in saving money on expenses

Operational Steps – the next round Look at reducing 3 of your largest costs

and evaluate the pros and cons: Labor- Should you downsize? Rent – Should you move? Marketing – Should you slash your

marketing budget?

Increasing Your Cost Structure (and therefore your Break-Even Point)

Need more leads to hit revenue targets or keep crews booked with work

Current overhead personnel can’t take advantage of opportunities to grow the business

Business is in growth mode

What might Increase Break-Even?

Lower Gross Profit Margin Raise wages or hire more expensive (more competent) workers Use better materials

Add Overhead Infrastructure Add Overhead personnel

Increase Advertising/Marketing Costs Attract higher functioning team members

Add benefits Increase wages/salaries

Increase capacity Bigger shop/office Purchase Vehicles or equipment Add a spray booth

Stay on top of your profitability Update Projection Monthly Focus on Marketing Activities Focus on Productivity on Jobs Keep Revenue and Hours targets top of

mind Implement weekly management & sales

meetings for accountability Stay informed with continuous monitoring Take action quickly when indicated

Knowledge is power

Knowing your numbers and learning how even small but timely changes affect your profitability increase your opportunities for success in any economy.

4 Free Things You Can Do Today

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If you need more help with a budget/profit plan for your business just give me a call at 619.291.3700

Contact us to help get your business On Target for success in 2011!

Advisors On TargetLinnea BlairOffice: 619.291.3700Email: Lblair@AdvisorsOnTarget.comWeb: AdvisorsOnTarget.comTwitter: AdvisorOnTargetFacebook:facebook.com/AdvisorsOnTargetLinkedIn:linkedin.com/in/linneablair