Profit Is Not Optional

Most business owners are clear in their intent to make a profit, but some set their sights higher than others. How much profit do you need? Is a living wage plus a reasonable return on your investment enough to sustain your business? Probably not.

As we come out of our economic slump, most concrete pumpers are seeing sales increase. Based on the 2013 ACPA Financial Benchmark Study, 89 percent of members saw growth in 2012, with a median increase of 22.6 percent.

Members participating in the study expected similar growth for 2013. Many members I have consulted with this year have added equipment to meet the growing demand in their markets.

As sales increase, your business requires more resources. It takes more equipment and people. Your business will need to produce enough profit to pay for the growing employee and asset base. Even if you decide to borrow the money to buy new assets, at some point you must pay it back. So in the long run, your business needs to produce enough profit to:

• Pay your salary and any additional return to owners;

• Acquire the assets you need to support your growth; and

• Pay back debt.

Profit is not optional.
You must earn enough profit to pay distributions to owners, invest in growing assets and pay back debt. The more profit you make, the more likely you are to sell your business for a good price. Profit drives value. Think of profit as an additional cost you must cover to achieve your long-term value goal. It’s not nice to have, you need to have it.

We all know that this is true, but how much profit do you need? What level of sales will it take to earn that much on the bottom line? Do you know? There’s a simple tool you can use to find out. It’s called breakeven analysis.

Nobody is in business to break even. Still, it is incredibly valuable to know the minimum sales required because you want to do at least that much. It’s not the goal, but it is the key to developing the overall framework for your profit plan. It is a decision-making device that puts you in the driver’s seat— planning for profit instead of hoping for it.

The same process used to determine your breakeven point will also help you determine the point at which you’ll reach your profit goals. I call this “breakeven plus.”

The more comfortable you are using breakeven analysis, the more successful you will be in managing the profitability of your business. When you gain an intuitive understanding of your cost structure, you’ll be able to answer questions and make decisions about costs and pricing knowledgeably and confidently. Breakeven analysis helps you achieve that intuition.

Being familiar with your cost structure helps you recognize changes quickly and take appropriate action. Costs change over time—usually increasing—and when your costs go up your profit goes down, unless you take action to offset the rise in costs. Typically, we are slow to react to changes in our cost structures, hoping things will magically take care of themselves if we just wait it out. As we put off any corrective action, more profit is lost.

Looking at your P&L every month to see if you made a profit is not monitoring your cost structure. If you’re looking at a yearover- year comparison, you may be able to spot what expenses are changing; but that’s not the same as understanding how your cost structure is changing. “What’s the difference?” you ask.

Cost structure refers to the relative proportion of fixed and variable costs on your P&L. Variable costs are costs that go up when sales rise, and they go down when sales fall. Sales cause variable costs. Every dollar you make in sales will drive a certain proportion of variable costs, leaving you with something less than a dollar to cover your fixed costs and any profit you need to earn. When your variable cost percentage goes up, it takes more volume to drive the profits you’re after.

Want to improve your profit-maker’s intuition?
Track these figures each month and know your breakeven point in dollars and in units (such as number of customers, average job, yards poured, etc.):

Understanding your cost structure is important for decisionmaking and analyzing financial performance. Monitoring your costs in a format like this will improve your gut sense of how your costs and profit behave in relation to volume and price changes. With this kind of profit-maker’s intuition, you’ll make brilliant decisions more frequently.

Armed with this information, you can answer questions like these.

• What sales goals would help me achieve my required profit?

• How will I lift sales? How many jobs, at what margins?

• How would pricing changes impact my business plan?

• What sales are needed to recover the costs of an additional truck?

• What’s my strategy for building profit? Improved volume, pricing, cost controls? All three?

Breakeven Plus is a simple tool to use with just a little practice. Come to my free workshop, Pumping Up the Profits, at the World of Concrete, Wednesday, January 22 at 1:00 p.m., and we’ll use it to answer these questions and more.

Your sales goal is not a guess—it’s a pathway to profit.
With Breakeven Plus and the information you have about your cost structure, you can establish a sales goal that provides enough profit to fund your growth, your debt service, your salary and the return on investment you deserve.

Barbara Nuss is president and founder of Profit Soup, ACPA’s financial benchmarking partner. Her main focus is on helping clients gather and use information to build value in their business. Barb’s management and CPA background along with her years of experience working with industry leaders in franchising and trade associations have enabled her to build and implement maximum value benchmark initiatives. She is skilled at analyzing and presenting financial information so her clients can use it to learn from the past to set direction for the future.