A break-even analysis determines when your expenses, both fixed and variable, have been met and the company is making a profit. The sooner in the year you reach that point, the more successful the company has become. The break-even point is derived by dividing the fixed expenses by the contribution margin (the amount of profit per job that's available to pay toward fixed expenses). Here's an example:
First, figure the average dollar contribution margin per project:
$15,000 x .28 = $4,200
Then figure the break-even point:
$100,000 ÷ $4,200 = 24 contracts required
ABC Remodeling therefore must complete 24 jobs at an average sales price of $15,000 and a minimum margin of 28 percent to break even for the year.
If the average number of jobs that must be completed is unreasonably high, you must take steps to change that, Clay stresses. The options include raising your margin which many remodelers can do but fear doing and decreasing the variable cost of the jobs. On the other side, you can decrease your fixed costs by cutting back on office expenses or staff remembering that some cuts may affect your service abilities, affecting customer satisfaction and future sales.
Check out these tips for being supply-savvy when shortages strike.
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