Contractors: Make Money in All Seasons, in All EconomiesWednesday, April 17th, 2019
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How to Stay Above Your Break-Even Line
Home Repair and specialty contracting businesses can be cyclical. Seasons, weather, economic and other cycles cause periods of high demand and low demand.
The timing of some cycles is predictable like the seasons. Other cycles such as weather and economics are unpredictable as to when they will come, and for how long.
“The Line” is your business breaking even. Above “The Line” is profit. Below “The Line” is loss.
This article and video make the assumption that you know what your business’s break-even point is. The formula is:
Break Even = Fixed Cost ÷ Gross Profit Margin
BE = FC (costs you pay even if you don’t do any work) ÷ GPM (percentage that remains after subtracting direct job costs)
You must navigate and manage your business so that you stay “above the line” in busy and slow times.
Below are three examples of business and how they are managed. Which are you?
An “Above the Line” example:
In the image above the letters represent months. The dark blue line represents the business’s break-even point. The squiggly black line represents revenue.
A business that operates “Above the Line” makes money all the time. It makes more money when it is busy, and less money when it is slow, but it always makes money.
An “Above and Below the Line” example:
A business that is managed improperly may make money when things are busy, and lose money when things are slow.
The image above represents a business owner who makes some money in busy times only to lose it during slow times. This business owner is on an emotional roller coaster and is confused about what to do.
An “Below the Line” example:
A poorly managed business may operate at loss, “below the line,” most of the time.
In this business, the owner loses money and continues to borrow from creditors and vendors, until he is completely buried in debt.
There are significant problems in the business that are not being addressed. Often the employees are the wrong people, have bad habits, and have developed a poor or toxic culture.
The owner has been unable to face the brutal facts and make the changes necessary.
The owner struggles for many months at a time. For a few short periods, this owner gets his hopes up just as the business begins to near breakeven or go “above the line.” Often this is because of a very favorable business cycle, not because of the owner’s skills. Then the bottom falls out again.
This video comes from the exercise, “Staying Above the Line,” from The School of Entrepreneurship. The remainder of the exercise focuses on how to keep your business above the line.
These are the tactics it digs into:
- Know the difference between “busy” and “growth”.
- Don’t spend money you don’t have. And how to know whether you have it or not!
- Measure your financial numbers often. And how to, and what numbers to measure.
- “Bend The Line.” Inciteful information on how to change the line to meet your business.
“This is a must do for every business owner - I do mine every two weeks just to make sure that I am up to date on whether we are making money and moving forward or not. Doing it that often does provide for some erratic movement, but it makes me comfortable with what is going on in our business. In the beginning, I used a P&L to run our business, but it was so far in the past that it didn't really work for our contractor model.”
– Subscriber from Michigan
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