The breakeven analysis serves to provide the company with a very important piece of information: “How much revenue does the firm need to make in order to break even.” This number is very useful in several ways.
First, before you run into stressful times, establish a minimum goal that you can achieve. Perform “stress tests” on the company to see how profitability might be hurt if revenue were to decline 30% -40%. In a recession this amount of sales drop often occurs.
The second benefit during normal times is to ensure that the company does not take on too much fixed costs. Typically, if you have variable revenue, then you want a majority of your expenses to be variable. If you have fixed revenue, then you can have a greater percentage of fixed expenses.
VARIABLE REVENUE = VARIABLE EXPENSES
FIXED REVENUE = FIXED EXPENSES
This breakeven analysis is quite easy to do and can be done at any time of the year. The only critical piece of information that you will need to attain is a breakdown of the company’s expenses into Fixed Expenses and Variable Expenses.
The breakeven analysis is one of the first things you can produce. You need a list of the fixed costs and variable costs. Base this on the company’s latest financial statements.
Input the costs into the template. You will also be able to conduct various “What if” scenario analyses to see how the breakeven revenue will change.
The biggest challenge will be getting access to good information. If the client is using an accounting system such as QuickBooks, Peach Tree, or Great Plains, it should be relatively easy to bring up historical information. Otherwise, you will need to work with the client to come up with a list of expenses.
Once you are able to arrive at the breakeven analysis you can show the Owner(s)/Management this metric and make it part of their sales planning. Another idea might be to incorporate this metric into the Flash Report review meeting. This way the client’s staff can know on a weekly basis if they are on track to at least break even.
Click to download: Breakeven Analysis