Finding Your Break-Even Point
Your shop’s break-even point is the foundation of business. It’s the number that reveals whether you’re in the red or black—and by how much. Break-even points reveal the benchmark for business sustainability, and should be used by shop operators to set appropriate sales goals and price structures to ensure they achieve that goal month after month.
Kirstin Klabunde, financial consultant with collision industry consulting firm Collision Advice, discusses how to measure your break-even point, and how to use it to make better business decisions.
It’s critical for all shops to understand and measure their break-even point—a numeric benchmark that reveals the minimum sales performance required to stay in business. Tracking that number is key for shop owners to make successful business decisions from a financial perspective. Knowing the break-even point helps manage several aspects of business, including sales goals, pricing and profitability.
Many shops aren’t able to report their actual break-even point. Some have trouble calculating the number and others don’t pay regular attention to how it changes over time. Those shops run into several problems, such as reductions in cash flow, reckless spending, and development of inadequate pricing structures. All of those lead to reduced profitability. It’s very easy to spend more and charge less than you should without knowing your break-even point.
Your break-even point is easy to measure. Here’s how to calculate it:
1. Add all of your shop’s fixed and variable expenses together. This includes expenses such as insurance, equipment leases, salaries, health benefits, taxes, loans and mortgages/rents, administrative wages, insurance, and office supplies. On a profit and loss statement, this would be the amount of your "ordinary expenses."
2. Divide that number by your gross profit percentage. To calculate your shop’s gross profit percentage, subtract production costs from total revenues. Then divide the result by total revenues. It is best to use at least a four-month period of activity to calculate your gross profit to avoid basing your break-even point on a gross profit percentage that may contain irregular fluctuations.
3. The result is the sales amount needed to breakeven. That’s the amount of revenue you need to generate in order to cover all of those costs. This number can be computed using annual expenses and divided by 12 to get a monthly breakeven amount. It can also be calculated using monthly expenses.
Nobody is in business just to break even, of course. So you might also want to include the net profit you wish to obtain within your break-even number. That’s a different way of looking at your break-even point. Not everybody does that, but including desired profit into that number provides you with an overall sales goal that not only covers all expenses, but also guarantees a positive bottom line.
Knowing your break-even point can help you do the following:
Determine better pricing structures. It’s important to develop labor rates and parts markups based on your company’s specific financial needs, rather than following the lead of a competing shop. Identify what your break-even point is on a per-day and per-hour basis. That allows you to understand how much money needs to be earned per hour in labor and parts sales each workday in order to stay on pace with the monthly goal.
For example, say your total monthly expenses total $50,000, and you wish to earn a $10,000 monthly profit. If your shop’s gross profit percentage is 40 percent, your sales would need to be $150,000 per month to cover both the costs to produce those sales and your ordinary business expenses. If your shop was open 20 days per month, that would equate to delivering $7,500 in repairs daily. If your average repair is $1,500, and has 15 labor hours, that equates to producing five jobs per day and 100 jobs per month.
Develop appropriate sales strategies. Use your break-even point to clearly determine the number of jobs you need every month. Divide your monthly break-even point by your shop’s average repair bill. For example, if your break-even point is $75,000 and your average repair bill is $2,500, you need 30 jobs a month to meet your goals. If you’re not consistently obtaining that volume, that may indicate the need for improved marketing efforts to boost your shop’s market share.
Track and manage business expenditures. If your revenue barely meets your break-even point, that could be a red flag that your operating costs are too high. You might be overstaffed in the front office or have problems with supply and material waste that need to be addressed.
Proactively plan for future expenses. For example, you might consider adding a new employee when business is booming. Calculate how that person’s salary, health benefits and tax implications will impact your break-even point. Before making any decisions, determine whether you will realistically be able to increase charges or consistently generate more revenue to financially accommodate the added costs long-term.