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What is my breakeven turnover?

30 April 2020
Mark Friend
COVID-19, Accounting & Compliance, Building a Business

The current crisis has highlighted to many business owners how precarious business really is. In less than a couple of months many business owners have gone from looking forward to a bumper 2020 to seeing their once thriving business rapidly morphed into a wreck, with reduced or no income coming in, overheads still piling on, their workforce “furloughed” and cash quickly disappearing.

This is the first of a series of blogs on how to start rebuilding, protecting and strengthening your business to ensure that it will not be a casualty in these turbulent times.

Cash flow is key and we have already provided a simple cash flow forecast tool for clients to access here. If you need help with your cash flow please contact us. The cash flow is essential to identify pinch points- i.e. times over the next year where you will need additional funding.

Ultimately, however, the aim over the coming months will be not only to survive but to start to rebuild the business. The next step is to prepare a budget and more importantly to understand your business’ breakeven point.

Having a firm goal is vital. It is all very well having the big hairy audacious goal of a business turning over £10m and net profit of £1m but the goal needs to be realistic. Over the coming months many businesses will need to rebuild and for some getting back to where they were pre the crisis will be a challenge in itself.

If we are heading into a recession, which appears inevitable, then understanding what level of takings/turnover/volume of products to sale is essential. However, this cannot be an annual figure. Knowing what this figure is on a weekly or monthly basis provides the stimulus and the comfort to know that once achieved the position will start to improve.

We have provided a really useful but simple breakeven tool here, which can be used for most businesses. The service part is for a one man band company where you provide the service and charge your time on an hourly basis. The second states “retailer” but can be used for most businesses providing a product or service at a consistent gross profit margin.

Once you have set a breakeven position of where you are likely to be if you do nothing, it is then important to review the impact of changes you can make:

  1. What will be the impact if I increased or reduced my prices?
  2. Can I buy products for resale at a better price?
  3. What if I cut out expenses?
  4. What if I increased my marketing spend?
  5. What if I cut my personal costs?

Looking at numerous scenarios will help you to build an action plan.

E.g.

  • Increase prices by 3%
  • Cut wage costs by £25K by making X redundant.
  • Cut subscriptions to a magazine.
  • Cancel trade show in September.
  • Reduce commission levels from 5% of sales to 4%.
  • Increase marketing spend on google adwords from £400 per month to £600 per month.
  • Reduce personal drawings from £2,000 per month to £1,600.

The tool is however simplistic and might not be right for your business. The tool:

  1. Assumes that sales prices are constant at all levels of output. The impact of trade discounts are ignored.
  2. Assumes production and sales are the same. In practice stock and WIP levels will fluctuate.
  3. Break even charts may be time consuming to prepare.
  4. It can only apply to a single product or single mix of products. You will probably have numerous products lines with varying profit margins.

If this is the case then we can help. The model can be easily amended. We are also looking at a far more advanced product to assist in the key decision making.

“What if?“ is a great question to ask. Looking at different scenarios, putting together a plan of action and identifying your breakeven point is essential to rebuilding your business.

Now is the time to review, and if necessary reconnect and rebuild your business, and to remap the future and make those key decisions.

We are here to help you so please contact Mark, Andrew or your account manager to discuss how we can help you map out a better future.

The content in this blog is correct as at 30/04/2020. See terms and conditions.

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