THE DR. IS IN: Breakeven Diagnosed!
Knowing your numbers is the difference between making profit happen or just happening to make profit. Electronic systems contractors (ESCs) who understand their numbers use those numbers to make management decisions such as pricing and staffing.
Those who do not understand numbers are accidents waiting to happen; sometimes they accidentally make a profit and sometimes they accidentally lose money! And if they accidentally make a profit more often then not, they stay in business. But in today's economy, it's not so easy to accidentally make a profit. It appears to be much easier to accidentally lose money, and sooner or later, the business can't survive.
In the June issue, I discussed the difference between markup and margin. Remember that margin is always calculated as a percentage of sales price. Using your margin to create a sales price is an important part of the sales process. Reviewing your financials is an important part of the management process. While your proposals contain an anticipated margin, your financials can show you your achieved margin.
Once you determine the margin you are able to achieve, you can then use that number to create a breakeven analysis. A breakeven analysis is simply a numbers game that relates the gross margin to sales, overhead and profit. It is an excellent tool that can help you answer the "what if" questions: What if I hire another project manager? What if my sales volume changes? Should I invest in more marketing?
Breakeven example for increased overhead
For example, let's say that you are considering investing $7,000 in a new marketing campaign. Should you do it? To answer that, you might consider a breakeven analysis.
First, let's look at the current financial statement:
Profit & Loss Statement
Sales 300,000 100%
Gross Profit 105,000 35%