Business Financial Metrics – #5

Posted: February 11, 2013 in Business Financial Statements, Up-and-running Business
Tags: ,

This metric is the revenue breakeven point. This is found by first segregating the fixed expenses from the calculation.  The following should be fixed expenses:

  1. employee salaries and benefits
  2. rent for premises
  3. equipment rentals
  4. amortization
  5. accruals for annual accounting expenses
  6. telephone, cell phones and internet/networks
  7. Fixed bank charges and fees

The remaining expenses should be considered as variable expenses (in that they change with changes in revenue).

Revenue less variable expenses = the (dollar) contribution margin. The percentage contribution margin is simply the quotient of the dollar contribution margin divided by revenue. The result is a percentage figure.

The breakeven point in revenue is:

Fixed expenses / contribution margin in %

Why is this important? Well, very few business owners know what their revenue breakeven point is no do they understand how adding incremental fixed expenses adds to (increases) the breakeven point.  A growing business with very slim gross margins can compound its cash flow problems by adding one additional staff member (who is not revenue generating) or any other small fixed expense on the income statement.

The higher the breakeven point the greater the risk should your client base take a hit by losing one or two customers.

The well managed businesses are slow to react to growth spurts by adding to head count until such time as they see the growth is real and… that the growth in revenue will add to the bottom line.



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