“A budget doesn’t limit your freedom; it gives you freedom.”
Many kitchen and bath firm owners believe that just by getting big jobs throughout the year, they will eventually reach their goals. However, that logic doesn’t account for mismanaged funds. Too many owners let valuable opportunities get by, and the only solution to mastering your business comes from budgeting your expenses.
Kitchen and bath owners who follow an annual budget wouldn’t be surprised to know that they have more successful firms than their industry peers. Comparing your estimated budget with your actual monthly budget will allow you to navigate through spending and investing with sharper accuracy, giving you a firmer grip on your business and ultimately leading you to higher profit margins simply from better decisions.
Seven steps to determining your break-even point
A budget may not seem more than an accurate statement of the numbers your business wants to do, but owners can use them to make their operations more efficient and raise their gross profit margins. Robust profit and sustained success come from planning.
Analysis of your spending can help you calculate your firm’s break-even point. A break-even point is helpful because it lets you know how much your firm needs to make each month to run your operations. First, identify all your variable and fixed expenses to find your break-even point.
The kitchen and bath dealers’ most significant variable expense is always the cost of sales. Materials used for projects, labor, payroll and subcontracted, and transportation is all part of your cost of sales. Other crucial variable expenses include sales commission, sales payroll taxes, advertising, marketing tools, and traveling entertainment.
Enter your variable and fixed expenses into your budgeting program to find your break-even point.
Step Calculation
- Enter the income for the period $2,000,000
- Enter the variable expenses total $1,314,200
- Calculate the contribution margin
(CM = Income – Variable Expense) $685,800
- Calculate the contribution ratio
(CM Ratio = Variable Expense ÷ Income) 0.3429
- Enter the fixed expenses total $535,800
- Calculate the break-even point
(BE = Fixed Expense ÷ CM Ratio) $1,562,554
- Calculate break-even per month $130,213
You’ll want to use the sums of substantially completed projects to draft your budget. Then, check your work by adding your fixed expenses to the operating profit and dividing that sum by your contribution margin.
Applying the break-even analysis to your operations
Given how large your jobs can be and how much you charge for your products and services, you may have employees who think you have gotten rich in this business. If that’s the case, chances are you have a formal relationship with your staff and are not running a transparent business. Imagine how your team would respond if they discovered that your company doesn’t earn one dollar until it completes $1,563,000 worth of projects.
If you’ve hired well, your loyal team will become vigorous in achieving more significant sales in a shorter period to meet your firm’s bottom-line needs. You could set up incentives to motivate your team to achieve profit goals quarterly. Competition in the workplace has been proven to elicit better results from team members. Add competition to your workplace and see your design assistants put more detail into their renderings. See your estimators achieve more precision in their calculations. Notice your project managers and subcontractors performing more efficiently on-site to get the job done problem-free and on time.
Studies have shown that employees prefer to know where they rank. Quarterly goals to reach your job production quota can motivate your team to achieve better results than they ever have before.
Projecting year-end net profit
Once you know your break-even point, you’ll be able to accurately project the year and net profit based on nine months worth of figures, and your accountant can get a head start on your tax planning.
- Project year-end income (based upon unfulfilled sales orders) $2,102,000
- Subtract 12-month break-even point (based upon nine-month results) $1,604,400
- Overage $497,600
- Multiply by CM ratio (based upon nine-month results) 0.3526
- Projected pre-tax net profit (based upon nine-month results) $175,454
Notice that the result will be more than the budgeted net profit. One tax-planning strategy might be to reduce the corporate net profit below $50,000, where the government payment is only 15%. Good accountants will consult you on your options to achieve this – but you need an excellent break-even analysis command.
—SEN Leadership Team
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