Break-even Analysis Part II – Going Beyond Break-even

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Break-even Analysis Part II – Going Beyond Break-even

February 14, 2019      In Monthly Mission No Comments

In this month’s Monthly Mission, the goal was to calculate your break-even point and compare calculated revenue to your backlog to see if you are starting the year on solid ground (30% of your goal revenue is already in backlog/under contract).  The break-even calculation creates some simple revenue goals that show how much revenue is needed to cover your basic operating costs and can be used as a “floor” or minimum goal each month.  (If you are a member of our All Access, you may have even used Shane’s template with the pretty graph.)

Now for the next steps!

Now that you know how much you need to break-even, can you refine your financial goals or do some further analysis to help set a course for the year ahead?  While you’re at it what about deciding on some key metrics to track for the year?  Doing the analysis now and setting the goals early in the year helps in several ways:

  • you get to develop a road map of the steps to take on a weekly, monthly or quarterly basis to reach those goals while there is plenty of time left in the year.
  • you have a common theme or goal to keep everyone focused when things get really hectic during the busy season.
  • you have information and trends so you can look back on your year and decide what worked, what didn’t and what you want to repeat or change next year.

Here are some common goals we see or help track.  You can mark the ones that you would like to investigate.

  • Goal net income for the year – What is your goal net income for the year?  Will you obtain it from sales or savings or a combination of both?  Now that you know break-even and hopefully have that budget done you can set a target for the year.
  • Reduction in overhead/fixed expenses for cost savings – What if you shave $X off overhead spending for the year? How does that affect net income?
  • What if scenarios for gross margin (i.e. What if I made 22% gross margin instead of 20%) – What happens if you increase efficiency or productivity in a specific operation with a goal of gaining x points of gross margin? Set some targets and see what benefits you can achieve.
  • Capital investments for growth – Do you need to add software, construction equipment or vehicles this year? Will those $s significantly change your debt or cash needs?  Will they impact your bank covenants?
  • Adding employees for growth – What are your plans for adding staff? Are they field or office staff?  Will there be added costs while they are trained or on-boarded?  Don’t forget burden, computers, vehicle allowance or cell phones in your analysis if they are relevant to the position.
  • Tax distributions for distribution planning – How much should you plan for income taxes (based on last year’s return or this year’s projections)? How does that affect cash flow?  How does it affect equity?
  • Timing of revenue based on schedules – How does the timing of work affect cash and goal net income? Are there low spots in the schedule you need to plan for?
  • Ratio analysis for bank covenants – Will you meet bank covenants at the end of the year?  Do you have a significant change in your debt structure that you should monitor for compliance?  Tracking your ratios and looking at your projections for the months ahead will help you spot a trend that may need some attention before year end.
  • Bonding capacity to grow revenue– Does your bonding capacity fit with your revenue goals?  Do you have the working capital and equity for the size of bonding program you require?  Have you visited with your surety about your goals and how they can help?
  • Cash flow analysis to manage monthly cash needs – What will this job/change/customer/growth do to cash flow?  Regularly scheduled WIP reviews can help detect items that may impact cash flow in the coming months.

Did you mark the ones you’d like to investigate further?  Great!  What other ideas did it spur?

Now that you have your list you can detail plan your financial future.  You can set up simple metrics to track your goals on a weekly, monthly or even quarterly basis. If you are our client, now it’s time to start gathering YOUR goals, questions and financial information and prepare for your upcoming planning meeting with Shane using our Atlas Growth Model ™.  If you’d like some help deciding what to track just reach out to either one of us.

Have a great week!

Shane and Melissa

If you would like to learn more about the Atlas Growth Model ™or know someone who could benefit from company financial planning just like this, please forward this post or reach out to us at hello@atlascfo.com

Would you like our template for break-even analysis? If you are a member of the Atlas All Access group, log in and type Budgets or Break Even in the search box or scroll to the section dedicated to building a budget.

Not a member, join here!

 

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