How to achieve 50% above breakeven in 2020
It’s a critical time of year for making plans for the future.
It’s a time when we make key decisions about where we’re heading in business over the next year and beyond, and it’s a time when a large majority of businesses set budgets and a financial plan for the year ahead.
The big question is always, how do we know if we’re aiming high enough in our plan? Is it ambitious enough? Will it make 2020 a year of serious progress? One key measure to test your plans by is, will we achieve 50% above breakeven? If we aim for 50% above breakeven, then we’ll be set up for success, whatever the next year may throw at us.
Let’s start by recapping on how to calculate breakeven. If you haven’t stopped to check what your breakeven is recently, its worth pulling out your accounts and calculating it now:
Breakeven = total expenses* / GP%
*total expenses should include:
- Overheads
- Loan repayments
- Owners' drawings
- Tax provision on loan repayments and owners’ drawings
- Premises rent (even if you own your premises)
The critical point is that we must set our targets to aim to get to 50% above breakeven. Just to illustrate this, we’ve got a business here who set out their initial plan for 2020 as below:
| Initial plan for 2020 | ||||
| Sales | £5,000,000 | |||
| GP% | 33.0% | |||
| Gross profit | £1,650,000 | |||
| Overheads | £890,000 | |||
| Owners remuneration | £320,000 | |||
| Net profit | £440,000 | |||
| Net profit % | 8.8% | |||
| Corporation tax | 144,400 | |||
| True net profit | £295,600 | |||
| True net profit % | 5.9% | |||
Business also has annual loan repayments of £20k
| Breakeven Calculation | ||||
| Total overheads | £890,000 | |||
| Owners remuneration | £320,000 | |||
| Loan repayments | £20,000 | |||
| Tax provision | £85,000 | |||
| Total expenses | £1,315,000 | |||
| Breakeven sales | £3,984,848 |
|||
| % above breakeven | 25% | |||
While that’s certainly not a bad plan, it comes out at 25% above breakeven. But it only takes a few tweaks to make the plan come out at 50% above breakeven.
In this business, after some discussions, the directors came up with a realistic plan to achieve an additional £500k of sales, to increase GP% by 1.5%, and to cut £50k of unnecessary expenditure out of their budget, and now they have a plan to be 50% above breakeven in 2020:
| Revised plan for 2020 | ||||
| Sales | £5,500,000 | |||
| GP% | 34.5% | |||
| Gross profit | £1,897,500 | |||
| Overheads | £840,000 | |||
| Owners remuneration | £320,000 | |||
| Net profit | £737,500 | |||
| Net profit % | 13.4% | |||
| Corporation tax | 200,925 | |||
| True net profit | £536,575 | |||
| True net profit % | 9.8% | |||
Business also has annual loan repayments of £20k
| Breakeven Calculation | ||||
| Total overheads | £840,000 | |||
| Owners remuneration | £320,000 | |||
| Loan repayments | £20,000 | |||
| Tax provision | £85,000 | |||
| Total expenses | £1,265,000 | |||
| Breakeven sales | £3,666,667 |
|||
| % above breakeven | 50% | |||
With some clear focus on the right areas, it is possible to have a plan to hit 50% above breakeven for 2020.
So step back, and look at your budgets for 2020 in this light. What can you do to get closer to 50% above breakeven.
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