Beyond Breakeven: Plan for profit, don't just hope for it
What is the most important financial skill you need to build an infrastructure for growth in your business? Benchmarking? Cash flow forecasting? Ratio analysis? Creating ninja-level spreadsheet formulas?
In our experience, the answer is none of the above. When it comes to financial management, reasonable minds may differ, and do. For us, it’s mastering Breakeven Plus, a four-course series we’ve developed as the fastest and most effective way to hone what I call your “profit maker’s intuition.” Once you’ve dialed up that intuition, your ability to make the right decisions that lead to more profitable growth goes way up as well.
When savvy business owners have a decision to make, they don’t spend hours agonizing over their numbers. They have what seems to be a gut sense about money-making choices that guide how they invest in and change their operations. But what we call a gut sense is actually a deep knowledge of how their actions around pricing and market positioning affect volume, and how operational investments and changes affect profit. This is knowledge so ingrained that it becomes almost intuitive—which enables them to act quickly, decisively, and proactively, protecting, if not bolstering, profits.
Are their decisions always brilliant? Maybe not, but they make brilliant decisions frequently enough to vastly outperform their competition.
How does it work?
So what is Breakeven Plus, and how does it differ from breakeven analysis? Breakeven is a formula that calculates the sales needed to hit the breakeven point, meaning a business is neither making nor losing money.
Breakeven Plus uses this breakeven formula as a starting point, adding targeted profits into the mix. The result represents the sales needed to reach your profit goal. Since profits are the lifeblood of any business at every stage of its life, why not set your goals based on the profit you desire and require?
In the short run, this analysis allows business owners to see how changes in price and costs affect their target profit and the volume needed to earn it. When analyzing expansion opportunities and planning for inflation or recession, we’ve found that mastering Breakeven Plus is a game changer. For example, it allows you to determine answers to questions such as:
- If we increase our prices, how much can volume decrease before losing any profits?
- If we cut prices to stay competitive, how much additional volume is needed?
- As we grow, what investments will we need to make in technology, equipment, or people?
- How much in sales do these investments need to create to not only cover their costs but make a profit?
- In inflationary times, if our suppliers increase their prices, what do we need to pass along, absorb, or cut to protect our profit?
Sense a theme here? Profits are not optional. Always plan for profit. Don’t just hope for it.
Profit growth mindset
For the long-term viability of a business, seasoned business owners shift from thinking about what it takes to earn a profit to deciding how to best use profit to grow the value of their business. Profit is an important source of capital for every business. How much of it is already earmarked for debt repayment? What assets will you need more of, and will there be enough profit to reinvest in assets to support the growing business? If not, how much debt should you take on? How much will be distributed to owners as compensation, draws, or dividends, and when?
With a profit growth mindset, you can ask and answer these questions strategically because you are intentional about how you use profit and create your own pathway to growth.
Finally, when it come to creating value for your business, profits are the key. Strong profits drive higher offers from prospective buyers, allowing owners to exit in style.
As an owner or investor, your ability to make smart, swift, profitable decisions is critical. If you are a manager, department head, salesperson, or a career builder, your ability to advance is based on your skill at building smart business cases for your causes. Those with a strong profit maker’s intuition and mastery of Breakeven Plus will win out over those who don’t.
Barbara Nuss is president and founder of Profit Soup, a financial education organization specializing in providing services to franchisors and franchisees to enable them to trust their numbers, focus on priorities, make better decisions, and earn more profit. She can be reached at email@example.com or 206-282-3888.
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