Once you’ve checked your business vitals (see our previous post, Why You Need to Regularly Check Your Business Vitals ) the next step in assessing the health and performance of your organization is to begin comparing your key business metrics with your competitors.
Now, every industry has its own challenges, and its own means of measuring success, but there are a few universal standards that can be relied upon when making such comparisons.
In particular, you should look at gross profit and break-even analysis.
Gross profit is rather simple – it’s your sales minus the cost of goods sold (the direct cost of the production of goods sold or service provided).
The break-even analysis, however, is a little more complex. It is designed to help you analyze the various aspects of your business to ensure it breaks even and starts to become profitable.
This means taking into account fixed costs, variable costs, projected product/service sales, and pricing to determine the break-even point.
At its heart, the break-even analysis is a rather handy tool. It allows you to calculate the point at which the fixed and variable costs of producing your product or service will be recovered by the business. Or, in other words, at what level of sales volume (number of units, billable hours, etc.) will your product or service stop costing you money to produce, and start generating a profit.
Furthermore, the break-even analysis can help inform important managerial decisions, such as setting prices and developing new strategies.
Apples to Apples
As you work on your break-even analysis, you should appreciate that the break-even point for your business can be very different to those operating in other industries.
For instance, an organization working in the manufacturing industry will encounter different fixed and variable costs to those of an organization working in a service-based industry. That’s why it’s so fundamentally important to only compare your break-even point with your industry.
Comparing apples to oranges won’t get you very far.
Try this break-even calculator to get started with analyzing your own business.
Discovering Industry Standards
Once you’ve calculated your break-even analysis, you can start using it to benchmark your organization’s performance against competing organizations in your industry.
If you’re new to your industry, then it makes sense that you look to the leading companies to get a sense of the industry standards. That is to say, the key statistics that point to being a success in your industry.
For example, a restaurant has to sell a certain number of tables a night to make money. Over time, that number becomes the industry standard in that particular neighborhood. So if you were to open a restaurant across the street, you should be aiming to emulate those booking numbers.
You may be curious as to how you should work out the industry standard for your organization. Well, there’s no need for subterfuge; you can simply join a trade organization or association and freely access this information. The owner of our fictitious restaurant might consider joining the National Restaurant Association, therefore availing themselves of all the latest news, research, and restaurant industry forecasts.
Once you have implemented your measurement programs, and developed achievable targets based on these industry standards, you will be well on your way to establishing your business as an industry leader.
And with that position usually comes healthy profits and tax planning opportunities, but we’ll keep that for another post.
How Do You Measure Up?
If you’re not quite sure how to get started in determining the break-even point of your business, you’ve come to the right place.
We can provide you with a simple spreadsheet to help you, or we can guide you through the entire process, step by step. Either way, Checkbox is here to help.
Simply contact us today to get started.