FINANCIAL MANAGEMENT - BREAK-EVEN POINT
This is the 43rd of a series of newsletters published on Business Management and Management Skills. Not all topics will apply to your business, but each section will be beneficial to establish company goals and objectives. By reading and studying these newsletter articles, youre taking the first step in achieving your goals.
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Contractors are not in the business of selling the job at or below cost. Once you determine the estimated break-even cost of the job, you need to determine the selling price.
Break-even is the minimum amount of sales needed to cover expenses. That volume of financial activity at which you could continue in business indefinitely without making a profit is called your break-even point; however, the reason you are in business is to make a profit (here I am using the broader view of and definition for profit). So, if your profit and loss statement doesnt show a profit, youre not achieving your goal. Youre simply receiving back what was expended during the current recorded period.
Breaking even today does not return the losses occurred in the past, or build up a reserve for future losses, or provide a return on your investment (the reward for exposure to risk). With all business activities, there are risks. When an equitable (here I am selecting the concepts of fair, and justifiable) reward is earned, a return is honorable. Theres nothing sinful about making a profit. Its just darn hard to do!
Establish a policy of posting deposits and bills daily, including payroll. Use these figures to determine your average bills. After a full year of tracking, youll be able to determine your average daily bills and your average daily deposit. You can then plot these figures because its based on a year-to-year average. You will then know what you have to do each day.
When your deposits peak, you can learn to anticipate when heavy expenses will come. Youll then be in a better position to anticipate the lean times and compensate for them in advance.
NOTE: For additional information, please refer to the section on Accounting (#38) and Budgeting (#44) in this series of articles on Financial Management.
Copyright © 2002 Mike Holt Enterprises,Inc.