Understanding Your Breakeven Levels
Do you know the break-even levels for your business today? If not, you may in trouble. Not because of today’s low milk prices, although those aren’t helping. The root cause of this trouble is that, without knowing these break-even levels, you are “flying blind.” You may currently have a cash flow challenge, but, worse yet, you cannot fix it because you won’t know if and when it has been corrected.
Please allow me to start by defining break-even levels, as I view them. They are the level at which, if all your other factors remain the same, you’ll break even on your cash flows. For example, if you are running a gymnastics class and are losing $100/month, you will need to sell four more memberships at $25/month without incurring any additional costs, or perhaps you’ll need to sell five more memberships in order to pay for the $25/month advertising that you need to run in order to generate these added sales.
Similarly, on a dairy operation that is averaging 71 lb/cow/day, but whose break-even production level is determined to be 75 lb/cow/day, you will need to increase production by four pounds per cow per day, while keeping all other revenue & expense items the same. This is a tall task, no? Well, yes it is, but do you want to win or not? There is a distinct possibility that we cannot get the 4 extra pounds of milk at zero cost. However, what if we spent $0.25/cwt more on feed and then, as a result of increasing our production levels, were able to lower our other costs/cwt (labor, insurance, etc.) enough that we were then above break-even? Perhaps there are other costs that can, indeed, be reduced, too. Please look at everything.
I had one dairy Client who had 800 cows, ran a 40% cull rate, could not expand and yet maintained 975 heifers. By simply reducing the number of heifers he was raising, his heifer costs were reduced to a more reasonable level, allowing him to then make money.
This is the entire point of completing your break-even analysis. You just don’t know unless you do the budgeting & break-even analysis with comparisons to your current actual levels. Cutting costs is not always the answer, as learned by some who tried to do so in 2009 with negative consequences. However, if your feed costs increase 3% and yield a 6% additional return, chances are good that you’ll eventually achieve break-even status.
If you would like to learn more about similar topics and the tactics our Clients have used to improve their outcomes, as well as what applications of these lessons you can make in your business, please join us for our next Success Strategies Mastermind Group series of quarterly workshops in July 2019. They are designed to teach more people the Finance & Strategy Concepts that I offer business people. Signups have begun, giving you the opportunity to learn these same concepts and meet with other producers who have overcome some of the same challenges you may be facing. Check them out at:
Getting the right information needed and then moving forward with a proactive plan is what I consider Next Level Thinking! If you need assistance with these calculations, please let me know. I welcome your thoughts and comments.
The tools to calculate your break-even levels are available to subscribers at our website www.success-strategies.com under the section entitled “Financial Techniques.” If you’d like to listen to a presentation I recently recorded on YouTube, you can do so at:
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