Chapter 2 – Financial Control – Rule your money
This is part of the ‘How to’ coaching series. An ongoing series of activities to make your business successful. Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.
Activity 16 – I have a Break Even forecast for the business
It’s very important to know what your Break-Even point is. That will be the point at which it’s all profit from there on. That’s great, but how do you plan to make it to there; and when will it happen?
As with any forecast, your Break-Even point needs to be realistic. Remember that this is only a forecast and is only as good as the data you fill it with. At least a planned forecast is better than a finger in the air or a downright guess.
As a rule, I work on the premise that costs will be greater/sooner than anticipated, and income less/later than expected. This is by a small percentage, it just covers any unforeseen transactions or late payments. Build your forecast on these assumptions and you will be reasonably well prepared for most eventualities.
The overall forecast ‘incoming’ is made up of what is happening, what should happen, what is in the sales pipeline, plus experience based on previous results and expectations. Most costs will already be known and expected. For long term forecasting it is also useful to look to see if there are supplier price rises on the horizon: maybe there are rate rises, utility rises and rental cost reviews coming up too.
The more all-encompassing you can make your forecast, the more helpful it will be. Then the fun begins. Use the forecasts as part of your overall performance program.
The ‘How to’ bit:
Build a line chart (as per the title image) covering 1 year.
Money(vertical) against Time (horizontal). Use a range for income & expenditure that covers your numbers.
Fixed Costs– The ongoing costs to the business, Rent, Rates, Utilities, Phones etc
Sales Income– Built up of sales already made, in the pipeline and those planned.
Variable Costs– Costs of delivering the service/products that you have sold/plan to sell
Total Costs– Add Fixed and Variable costs together to show the total outgoing
Net Profit– This shows the financial situation of ‘income’ minus ‘costs’. This starts off as a negative number.
Although it may seem obvious, Break-Even is when your income outstrips your costs. It is worth trying out a few scenarios to see how they affect the timings on your chart.
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