Break-Even Analysis

By John Matthews, founder and president of Gray Cat Enterprises Inc.

One of the most-asked questions I hear from store owners is “What sales volume does my store need in order to make money?”  While it would be convenient to rattle off a sales figure off the top of my head, it undoubtedly is a store specific number.  What the owner is genuinely asking for is a break-even analysis for their store.

In an earlier post called Four Wall Analysis, I explained how to create a simple, yet important, Profit & Loss (P & L) report on the store, looking only at store expenses.  Store operators usually understand their store expenses associated with daily operations, but after layering on debt service, the break-even sales figure increases dramatically.  Much like a homeowner with a mortgage and car payment, store operators that add in large debt loads to their stores P & L, find tremendous pressure to increase top line sales.  This added expense load is the difference between making it or folding up shop.

A break-even analysis takes it a step further to include the following:

Variable Cost %

Fixed Cost $’s

Debt Service

The example analysis below (for explanation purposes only) determines a contribution margin of 24.75%.  Added to the break-even analysis is the annualized fixed cost of $91,100.  By adding the variable, fixed and debt service costs, then dividing the annual cost by the contribution margin %, it determines the sales volume required annually to offset the overall expenses.  The calculation indicates that a store would have to generate an annual sales volume of $368,081 in order to cover all of the related expenses.

 

Here are four key items to consider:

Itemize Variable Costs:  Shown as a percentage of sales in Step 1, add in all the variable expenses. Obviously this cannot exceed 100% and the difference between 100% and the total of all the variable costs is your store contribution margin. Said another way, if  store sales volume is $500,000 with an operating margin of 30%, the contribution margin would be $150,000.

Determine Fixed Costs:  Calculated annually and shown in Step 2, determine how much will be spent per category in dollars. Remember, these are annual amounts for each category.  Included in these categories should be all debt service charged to your operation.

Want to lower your break-even? Think twice about leasing a new car for a “company vehicle.”  These added costs to burden the store P & L and in some cases, unnecessarily, put a serious strain on the store’s overall success ratio.

Create “What-If” Scenarios:  While some variable costs are predetermined (i.e., royalty for a franchise operation), some may be managed lower through prudent operations.  Likewise, both fixed costs and debt service may be managed lower as well.  The best operators develop multiple break-even versions that span from best to worst case scenarios.

Re-Forecast Quarterly:  As a good rule of thumb, re-forecasting your break-even analysis every quarter helps shine a light on your wins and challenges. This re-forecast allows for the development of strategies and tactics for your operations team to address all of the shortfalls. Prudent management is essential for maintaining successful store operations. To that end, develop tactics to address these shortfalls in both cost control and management as well as through revenue-generating initiatives in local marketing.

All too often, store operators have a sales volume in mind to be profitable, but fail to recognize all of the expenses associated with their business.  The Four Wall Analysis (store P & L) combined with the Break-even Analysis is a way of helping store operators understand the importance of minimizing loading on debt.  In many cases, the stores performed well in comparison to its operation, but simply could not overcompensate for the added debt burden.

In the end, the piper always gets paid.

John Matthews is the founder and president of Gray Cat Enterprises Inc., a strategic planning and marketing services firm that specializes in helping businesses grow in the restaurant, convenience and general retail industries.  With more than 20 years of senior-level  experience in retail and a speaker at retail-group events throughout the U.S., Matthews has recently written two step-by-step manuals, Local Store Marketing Manual for Retailers and Grand Opening Manual for Retailers, which are available at www.graycatenterprises.com.

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