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Financial management 4 – Breakeven point

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Once you have made some realistic estimates of your sales and expenses, it is time to move to the next important financial management tool.   That is your ‘break even point’.

Break even point is that point where you stop making losses and are about to make a profit.  Break even point is different for every business because no two businesses are the same.

I will show you a simple example:

Let’s say you make $80,000 sales for the year.  Whatever it is you sell, there is a cost of making it, creating it and delivering it.  The total cost includes things such as raw materials, parts, the cost of your time or someone else’s time and freight in and out.  Even if it is only your time and expertise involved, there is still a cost.

So let’s say that the total of the costs directly related to making / creating / delivering your product or service is $50,000 for the year.

That means your Gross Profit for the year is $30,000 (i.e. $80,000 – $50,000).  Before you go thinking that this is your profit for the year, this amount left over must now be used to pay your overhead expenses.

All businesses have overhead expenses, and yours will be no different.  These are expenses incurred in running your business but are not directly related to making / creating / delivering your products and services.  Overhead expenses include things like rent, telephone, vehicle expenses, leases and other financial commitments that you must pay whether you make a sale or not.

So let’s say your overhead expenses are $30,000 for the year.

Recall above that your Gross profit (contribution to overheads) was $30,000.  If your overheads are more than this figure, you make a loss.  If your overheads are less than this figure, you make a profit.  (Profit is a strictly defined accounting term but let’s not complicate the example).

In this simple example, your overheads are $30,000, equal to your Gross Profit.  You make neither a profit nor a loss.  This is your breakeven point!

So the way your business is currently organised, and with your current pricing and cost structure, your break even sales are $80,000.  If you make any more sales, the Gross Profit from those sales (i.e. deducting the cost of the sales) will fall straight to the bottom line because your overhead costs are paid (providing they remain fixed).

This is great information to have – to know that if sales fall below $80,000 (or $6,667 per month, you are in trouble.

You can achieve gains either by increasing price, increasing sales volume, or by reducing your overhead costs, or by reducing the costs of making / creating / delivering what you sell.

Any change in these variables will of course affect your break even point.

You must check out these sites:

http://www.aikido-secrets-to-calm-success.com

http://www.griffithaikido.com.au

Until next time!

Gary

Financial management 3 – forecasting sales

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In recent posts in business coaching Brisbane, I highlighted the need for regular accounting and for comparing actual results against your budgeted target.

Now for the really tough part of your budget!  That is forecasting revenue.  This is difficult because any realistic revenue forecast depends on what your plans are to attract potential customers and convert their interest into sales.  Most people do not have a clear idea of this because they are inexperienced.

If you have no real plan, or you adopt a shotgun approach to see what works and what doesn’t, then your budget revenue is probably going to be low.

In my experience, the majority of people make the mistake of assuming sales will somehow just happen, as if by magic.  That’s the ‘rose coloured glasses’ effect.  You can’t be complacent!  You have to make sales happen and you must have a clear plan of action.

So forget about assuming a one line sales figure in your budget.  Dig in behind the figures and think about what specific actions on your part will generate sales.  Any financial forecast should be merely a reflection of your intended actions.

The sales equation is ‘Sales Revenue = Price x Volume’.  Now there are two variables but even this is too general.  You must dig down further and determine the day-to-day drivers of ‘price’ and ‘volume’.

Get specific and assume nothing.  Get real with your pricing and take off your rose coloured glasses when figuring out where your sales volume will come from.  You must build your sales budget from the ground up, group by group, customer by customer if necessary.

This is the only way that you will be able to find out why your actual sales, in any month are under or over your budgeted sales.  Knowing where you over-performed or what you need to work on next month is priceless management information that can only come from taking the budgeting process seriously and building a useful sales history.

So why do I give you this valuable information free?  Because I know from experience that only a handful of the 40,000 readers of this blog will take any notice at all.  But to the few who do, it will put you one step closer to controlling your business, instead of allowing it to control you.

Check out previous Financial Management 1 & 2 posts by business coaching Brisbane.

Two interesting sites I highly recommend you visit are:

Spiral Photography at http://www.spiralphotography.com.au

Griffith Aikido Institute at http://www.griffithaikido.com.au

Until next time!

Gary

Start up your own business

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Is 2011 going to be your year to start up your own business?  Have you got something a little different to offer?  Have you got what it takes to survive and grow?  Here are the top 7 traits that I am looking for in my business coaching Brisbane – online class of 2011:

1. Is your motive true?

If you are frustrated with your job or have visions of easy money then you are doing this for the wrong reason.  You need to be passionate about the value of a product, a service or a cause.  You business will reflect who you are; it will become your life – so make it count!

2. Do you have an ethic of hard work?

Most people in business work hard until they learn to work not so hard, but a lot smarter.  However, if you think that business means easy money and that all business people are rich, then you are clearly not cut out for this.

3. Do have persistence?

You are more likely to succeed if you have the determination to keep going especially when things get a little tough.  Business is a journey and success, regardless of how you measure it, is not an overnight achievement.

4. Do know your own strengths and weaknesses?

It is important to have an honest appreciation of what is lacking.  If you know what you are not good at then you can outsource to someone with the desired expertise.  Similarly if you know what you’re good at then you’ll be doing what you do best.

5. Are you a planner or an impulsive leaper?

In business it pays to be a planner.  That is not to say that you shouldn’t take risks.  Planning simply takes the needless risk out of a venture.  Good people, good advice and a thorough understanding of your market will remove a lot of risk.

6. Are you optimistic and opportunistic?

If you can see opportunity where other people see problems, business is probably for you.  You will encounter plenty of problems along the way so having a ‘cup half full’ attitude is desirable.

7. Can you enlist others to your cause?

This is where shallow motives will bring you undone.  If you are living your truth then you will have passion and belief.  They will radiate from you in all directions.  Passion and belief are infectious and people will follow.  Without it, you will be just another struggling merchant.

Until next time!

Gary

For 100 ideas to start up your own business and valuable knowledge that every entrepreneur should have, read my latest book at:

http://garyweigh.com/recession-riches-and-wealth

Business coaching Brisbane – Financial management 2

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Keeping your receipts in a shoe box and handing it over to the accountant once a year is financial madness.  Don’t be surprised if you are out of business after your first year with that attitude to financial management.

Regardless of what business you are in, you need to keep a close watch on money coming in and going out; and know what your bank balance is on any day.  The least you should do is to buy a small business accounting package.  This will enable you to keep track of revenue coming in and expenses paid out on a monthly basis.

There are plenty of available accounting software packages out there that will do the job.  Just make sure that the one you select is set up for an Australian business.  Our GST, BAS and tax system is like no other.

So once you have your accounting software installed and working, you can now monitor the performance of your business on a monthly basis.  If you input your revenues and expenses daily then you can monitor your business on a ‘month-to-date’ basis.  This is only the first step on your financial management journey.

You need a benchmark to compare against each month.  It is great knowing how your business is going but to be able to see a comparison against ‘forecast performance’ would be even better.  The better quality packages allow you to set up a budget and to design ‘budget v actuals’ reports.

Now you need to prepare a budget.  A budget is really the financial translation of all your plans and strategies.  Your expense budget should be reasonably straight forward because most expenses are known in advance.

The trap to be careful of is that expenses are not the same each month.  Some bills have to be paid weekly, others monthly and some annually.  Take into account the ups and downs of your forecast expenses.  That’s what helps create a realistic cash flow forecast.

I will continue in the next post of business coaching Brisbane with the tough job of forecasting revenue.

Until next time!

Gary

Check out my Aikido Secrets blog at http://www.aikido-secrets-to-calm-success.com

Grab my new book http://www.garyweigh.com/recession-riches-and-wealth

Business coaching Brisbane – financial management 1

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The Aiki business coach

If I had to choose one business management weakness that I have observed in the many start ups and SMEs (small to medium enterprises) I have encountered, it would be financial management.  Many large companies are also guilty of poor financial management but they are no longer the focus of my attention.

Financial management is the most ignored and the least forgiving.  If you can’t maintain control over your finances then you won’t be in business for long.

One of the biggest mistakes is waiting until the accountant has finished the year end figures to find out what happened.  Most accountants do a very good job of preparing Income Statements and Balance sheets but it is old news.  By the time you see what happened, you are well into the next financial year.

Engaging a public accountant once a year does not guarantee success.  Their job is one of compliance, not financial management.  Their main line of work is reporting after the fact, and tax lodgement.  It is not that they aren’t trained and capable of assisting you with financial management, but you have to ask for it.

You really need to know what is happening in your business week by week and month by month.  Either you or someone who understands financial concepts should make financial management of your business a very regular priority.

One of the other main areas of concern is poor control over cash flow.  Cash flow simply means money in and money out of your business.  You might make a profit at the end of the year but there can be many days during the year where your business bank account is empty or overdrawn.

This occurs because the receipt of revenue and the payments of bills are patchy.  Some customers make you wait 2-3 months for your income but many of your bills need to be paid immediately.

This is often compounded by the owner taking cash out of the daily takings for personal use.  The argument is “It is all my money!”  Well it’s not really.  Your money is the part left over when all the bills, including GST and taxes, are paid.

Many people confuse sales revenue with profit and fail to understand the importance of positive cash flow.  Recognising these differences could be one simple solution to saving your cash-starved business.

Read more in my next post in the series – business coaching Brisbane; financial management.

Check http://www.aikido-secrets-to-calm-success.com for business self development tips based on the powerful principles of the Japanese art of Aikido

Until next time!

Gary