In business, there are hundreds of numbers you could be tracking and the key is to know which one to focus on at the right time.
Recently we’ve had a number of discussions with clients where they have expressed concerns about whether or not they should cut costs in their business.
‘Is it time to batten down the hatches?’
‘We are behind in our tax debt; what should we be doing about it?’
In tough times, you can bet the strong will get stronger.
I am still positive about the real estate industry but cycles are inevitable and smart businesses are proactive about protecting their position in the market.
Some companies may already have themselves in a slight pickle but haven’t given up the fight and want to know what they should do.
The first thing I do with anyone in this situation is calculate their break-even point.
Your break-even point is one number you should always know.
The break-even point can be defined as the level of earnings for a business that results in zero net profit, or when you don’t make a profit or a loss.
No one has ever said, ‘I cut costs too soon’ but they have said,
‘I should have cut costs sooner.’
Understanding your break-even point helps you to:
- Understand the drivers of profitability. When you understand the drivers of your business better, you make better decisions.
- Sanity check – the level of performance required from the business. For example, how many sales do I need to pay the bills?
- Focus on removing costs that don’t add value to your business and reduce the risk in your business by lowering your break-even point.
The classic break-even point is a profit based break-even, which is the level of income you need to make zero profit.
I also like businesses to calculate their cash break-even, which is the level of income that meets your ongoing expenses and the cash required to meet other commitments such as loan repayments, tax payments and necessary owners’ drawings.
If you are worried about where to focus your attention in your business right now, start calculating your break-even point.
You can then focus on reducing the risk of not making that number through lowering where your break-even point sits.
Whether you are ready to think about cutting costs or not, knowing your current position is the right place to start.
No one has ever said, ‘I cut costs too soon’ but they have said, ‘I should have cut costs sooner.’
The one number you should always know in your business is your break-even point.
Fixed costs ÷ gross profit percentage = break-even.
Real estate specific break-even
Fixed costs (net of fixed PM income) ÷ gross profit percentage = break-even.