Alphabet Soup: “X”

man in business suit standing on road with arrows leading left and rightWhen I began the Alphabet Soup series in 2015, the concept seemed easy: take a letter of the alphabet in turn each month and examine business topics, concepts, and words that began with that month’s letter. With this month’s letter, “X,” I have hit a roadblock. So, following that analogy, I shall take a detour this month. Instead of considering “X” to be a letter, I will define it as a symbol. As a symbol, “X” can indicate a crossing point (as in a railroad crossing warning sign) or a crossroads (as in a highway sign). From that perspective, I will examine a crossing point and some crossroads that business owners encounter.

Break-even Point – This is an example of a crossing point. The break-even point is the level of sales (which can be expressed in dollars or units) at which revenue crosses fixed and variable costs. Profit at the break-even point is zero. Sales levels below the break-even point result in a loss, while profits above the break-even point yield a profit. Obviously, the goal of all businesses is to operate above break-even, and the further they are from the break-even point, the larger the profit is. I will not explain how to calculate the break-even point as there are multiple websites and textbooks that explain the process.

While it is important for business owners to know their break-even point, the critical activity is to have a strategy to manage it. In a business with a single product or service, one break-even point can be calculated. However, as businesses are complex and some cost components may only relate to one aspect of the business, multiple break-even points may need to be considered in order to manage the business efficiently. In an auto dealership, sales, service, parts, and the body shop all have different cost components which will result in unique break-even points. Using a single break-even point for the overall business would not provide management with useful information. A standby generator company that makes sales, performs installation, provides service, and has a parts department will have multiple break-even points. Consider the detailed activities of your business when determining what break-even points to calculate.

In order to develop a strategy to manage break-even, in which the object is to lower the break-even point so you can achieve higher profits at any given level beyond it, you need to examine each of the cost components. Any way you can lower fixed or variable costs will increase profitability. Variable costs might be lowered by sourcing items from a different supplier (a closer one would have lower shipping costs), or by performing an analysis of labor to find ways to streamline the process. Building contractors have perfected this approach, making sure for example that all wires are in a frame before wall board is installed. If that were not the case, extra labor time would be needed to “fish” wires through the wall spaces. Fixed costs can also be considered, especially when planning a new business or an expansion. Many restaurants purchase used kitchen equipment, which the customer does not see, to save costs while focusing on the dining area.  Continue reading: http://pgeist.blogs.ocala.com/11613/alphabet-soup-x/.

 

Speaking of Business Blog by Dr. Philip R. Geist, Florida SBDC at UNF

 

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