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There is one area where every business owner or director should be fully up to speed, and that is knowing your numbers. Revenue is great and profit is vital but, unless you know what your numbers actually mean, your business is flying in the dark. Here are a few things to think about when it comes to knowing the numbers.
There is a download here where you can work on your break-even point
Your break-even point is one of the most important numbers for any business. I’m sure you’re already familiar with what it is but, just for the sake of recapping, it is the point at which your income exceeds your outgoings. In simple terms, once your income has passed the break-even point you should be making a profit. So, it is clearly of importance for your business. Stay above the break-even you have a working business; go below it and you’re not making enough money to pay the bills. Falling below the break-even point regularly probably means you are heading into serious problems. Once there is no money left in the bank to make up the shortfall from your income, you are effectively insolvent. You need to know your break-even number and let it be your guide when you are judging how well your business is doing.
A very easy way to get yourself into financial issues is to have a misalignment between what you think your break-even point is, and the actual one. We see directors who tell us they were surprised by how easy it was to mistake something that appeared to be a bad month in terms of profit for one that was a disaster. It’s important to keep your break-even calculations dynamic. This is particularly true when it comes to changes in variable costs. We have all seen the damage a spike in inflation or utilities can do, couple that with an increase in a variable cost and your numbers can change dramatically. The targets you set for sales no longer apply but you may not recognise the change. The result of that can be an unexpected and rather unpleasant shock.
There is more to the break-even point than just a convenient number. It is a guide to the past, present and future, viability of your business. For many directors, for example, money coming in above the break-even will mean your dividend will be paid. If you are looking to expand or buy new equipment the amount you exceed your break-even will dictate what is possible. If you need to raise more money through the business, either by cutting costs or raising prices, your break-even will sit right in the middle of your plan.
We said earlier that unless you know your numbers you cannot operate effectively. One of the main reasons for this is that break-even is deeply embedded in your cashflow. Without an accurate break-even point your cashflow forecast can mean very little.
A good use of the break-even point is to use it as the basis of a series of potential scenarios. incorporating any fluctuations in the market that are regular occurrences. You need to know what these ebbs and flows in income will do to your finances so you can compensate for them. Scenario forecasting coupled with a good understanding of your numbers could help you see things more clearly. This is all about realistic options and potential changes in the costs for your business. For example, you can prepare for the future by asking questions such as:
Knowing your numbers will allow you to accurately assess what the past is telling you about the current state of your business and what the future may hold.
At the end of the day, your numbers are not something you can ignore or guess at. You should know them and know them well. This is particularly true if you are facing a potential financial issue.
The last thing you need if you are looking at a potential slide into insolvency is to not fully understand your financial position. If you don’t understand it you will be like shooting at an unknown, moving target in the dark. How can you expect to turn the situation around if you don’t even know what it is? Worse still, if you don’t know your numbers and don’t have an accurate break-even point, you can suddenly find yourself in a totally unexpected financial mess.
As always, we are here to help if you think you are facing insolvency. Your first port of call is our help for directors section where you will be able to book a free initial conversation if you think you are facing insolvency-level financial problems with your business.