For a moment, think about the benefits of knowing how much sales volume at what level of gross margin your business needs to breakeven each month. If you are like most building supply business managers, you might have an idea, but you most likely have never sat down and actually calculated it.
In my way of thinking, “Breakeven Day” is a hugely important time each month in the life of a business. It’s important because the earlier you can reach Breakeven Day each month, the more days you have remaining to increase the profit you will earn during that particular month. And the later Breakeven Day arrives, the less money your business will earn. And what if Breakeven Day fails to show up this month? The most likely result would be a month that produces red ink.
So it seems to me that Breakeven Day is a day everyone would want to see arrive earlier rather than later. The question is this: What can both management and non-management personnel do each month to cause Breakeven Day to arrive earlier in the month?
The answer to this question is precisely why Breakeven Day is such an important day for the owner or general manager of any business, but based on the work I do as a consultant to businesses in our industry, I’ve learned that in most businesses the operations personnel, the inside and outside salespeople, the administrative personnel, etc., don’t have a clue when or if the business makes a profit.
Over the years, I have been exposed to several innovative owners and managers who have taken this concept of Breakeven Day and used it—with respect to profitability— to help keep their employees’ eye on the ball.
Like several aspects of business, we all have the human tendency to get motivated about striving to achieve key metrics and benchmarks upon our initial exposure to them, but after a few months or years, we sometimes take our eyes off the ball and take them for granted. Breakeven Day is one way to keep everyone in the business aware of where the business stands with respect to profitability.
Here are some ideas for using this exercise to motivate your employees:
• The objective is to reach Breakeven Day as early as possible each month because the earlier you achieve breakeven, the more days you’ll have left to earn a profit. Until you reach breakeven, all you’re doing is trying to cover your company’s operating expenses. Some owners and managers initiate various types of celebrations when the company achieves a new record for achieving Breakeven Day.
• If your people can improve gross margin over and above the amount you budgeted, you can also achieve Breakeven Day earlier in the month. Pull out your copy of my book, “Gross Margin” and review with your inside and outside salespeople each of the 26 factors that affect gross margin. The book is available at BillLeeOnLine.com.
• If your people who have spending authority go under budget on operating expenses, recognize them, as well, because doing a diligent job of cost cutting can help the company set a new record for reaching Breakeven Day.
(Remember your high school algebra class.)
(ASSUME GPM IS 25% AND MONTHLY OPERATING
EXPENSES ARE $680,000)
25 X = $680,000
X (Sales) = $680,000
X equals $680,000 divided by 25, which comes to $2,720,000 in sales. So, for this sample company, assuming a 25% gross margin, Breakeven Day is the day of the month when the company reaches $2,720,000 in Sales.