Dealer Insights - September/October 2012 - Breaking Even For Profit
When you hear the phrase “break even,” you might think, “That’s the last thing I want for my dealership — we’re here to make a profit!”
True. But calculating your store’s breakeven point — and learning the real cost of doing business — can help you profit from better budgeting and planning.
WHAT IS THE BREAKEVEN POINT?
“Breakeven” can be explained in a few different ways. It’s the point at which your total sales are equal to your total expenses. It’s the minimum revenue volume your dealership must generate to avoid a loss. It’s where net income is equal to zero and sales are equal to variable costs plus fixed costs.
To calculate your breakeven point, you need to understand a few terms:
Fixed expense. These are the expenses that remain relatively unchanged with changes in your business volume. Examples: Property taxes, salaries, insurance and depreciation.
Variable/semifixed expense. Your store’s sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples: Commissions and new-car delivery, policy work, supplies, advertising and training.
Contribution margin. You can determine this margin by calculating the difference between revenue and the variable expenses associated with that particular income. Example: Gross profit less any sales commission.
HOW DO YOU CALCULATE IT?
The breakeven point isn’t complicated to calculate, but you’ll need some key data about your dealership: breakeven = fixed expenses / 1 – (variable expenses / sales).
Let’s look at an example based on the following annual figures for a store:
Annual breakeven = $912,000 / 1 – ($10,800,000 / $12,000,000)
= $912,000 / 1 – 0.9
= $912,000 / 0.1
Monthly breakeven = $9,120,000 / 12
The denominator is actually the contribution margin percentage of 10% ($1,200,000 / $12,000,000). So, you can simplify the breakeven calculation to: breakeven = fixed expenses / contribution margin %.
As long as your expenses stay within budget, your breakeven point will stay reliable. In the above example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $912,000. If you change either of these variables, your breakeven point will change.
WHAT ELSE CAN IT TELL YOU?
Breakeven analysis also can tell you the amount of sales you need to recoup an investment. Let’s say that your dealership has been performing a lot of custom jobs for customers. Your service manager sees an opportunity for custom exhaust work and wants to purchase a machine that can bend stainless steel to create custom exhaust systems.
Let’s assume the machine costs $10,000 (the fixed cost), and variable costs (labor, materials and commissions) for custom exhaust work are $60 for every $100 of revenue. The annual sales of custom exhaust systems needed to break even on the new equipment would be $25,000:
Breakeven = $10,000 / 1 – ($60 / $100)
= $10,000 / 1 – 0.6
= $10,000 / 0.4
CAN IT HELP GAUGE THE EFFECTS OF COST REDUCTIONS?
Yes! Assume the same figures from the first example above, except that you have an opportunity to reduce fixed computer system costs by $25,000 per year:
Breakeven = ($912,000 – $25,000) / 1 – ($10,800,000 / $12,000,000)
= $887,000 / 1 – 0.9
= $887,000 / 0.1
|Prior breakeven point||$9,120,000|
|With cost reduction||$8,870,000|
|Reduction in sales to break even||$250,000|
In this example, a fixed cost reduction of $25,000 decreases by $250,000 the amount of sales your dealership needs to break even. Such a cost savings could be a real boost in a slow-sales year. Another, easier way of calculating this is by dividing the cost savings by your contribution margin: $25,000 / 10% = $250,000.
USEFUL MANAGEMENT TOOL
Breakeven analysis is a multipurpose management tool: It allows you to set revenue goals to make any activity in your dealership profitable — and thus, it becomes essential in budgeting. Such analysis also can assist you in planning cost reductions. Your CPA can help you work through the calculations if you need assistance.
Dealer Insights - September/October 2012 Issue