Do you know your break-even point?

May 04, 2015

I was talking with a CEO the other day who is unfortunately experiencing some down turn in his business. He is someone we implemented a cost system for and fortunately since he knows his costs he is able to make quick decisions that have a big impact. Unfortunately he is a smaller operation and his accounting staff of one is not, let’s just say, the best. This person does not fully understand timing and cut-off and my client is experiencing wild swings in profit margin.

These wild swings make it very difficult to determine his break-even point. He keeps trying to plan what his loss will be for each given month based on the sales he knows he will have. At times he expects a $20,000 loss and ends up with $5,000 profit, or the opposite happens as well.

Of course this is quite frustrating for him and he wants it figured out, but does not have the ability to do it on his own and cannot afford to pay us to do it. The disappointing thing is when things were going well we warned him this was happening, but he could live with it because things were not so bad. Now he really needs to know that.

I really do not like being the person to say I told you so. I cannot tell you how many times I have said to a CEO or the like you need to do this or that, and they do not. The major problem is more often than not months, years, down the road they finally recognize that they should have listened and now it may be too late.

Knowing your breakeven point can help you plan each month. If you know you are not going to have enough sales to break even then you can adjust accordingly to soften the hit you will be taking. If you do not know your breakeven point you cannot be proactive and make necessary decisions.

Make sure you know what your breakeven point is. If your gross margin is wildly changing every month then something is wrong. Make sure your cut-off and timing are accurate in your recordkeeping. Your future may just depend on it.

Categories: Cost Accounting