A growth strategy as defined by Gartner Finance Glossary is an organization's plan for overcoming current and future challenges to realize its goals for expansion. Examples of growth strategy goals include increasing market share and revenue, acquiring assets, and improving the organization's products or services.
(Download Video Transcript)
To create a growth strategy, you first need to understand the break-even points for your products and services.
The break-even analysis is a calculation and review to understand how much your company needs to sell to cover the costs associated with doing business. The calculations examine the link between cash flow, profits, and sales.
Here are a couple of simple calculations to help you determine your break-even points:
- Break-even point (units) = Fixed Costs / (Revenue per unit – Variable cost per unit)
- Break-even point (sales dollars) = Fixed Costs / Contribution margin (Contribution margin = Price of the product – Variable costs)
Step 1: Determine Your Direct, Variable, and Fixed Costs
Direct Costs are the costs tied directly to your product or service. For example:
- Inventory – If you sell a product
- Employees – If you provide a service
Variable Costs are the costs that change as the quantity or service changes. For example:
- Utilities and Raw Materials – If you are a manufacturer
- Credit Card Transaction Fees – If you sell and ship products
Fixed (or Overhead) Costs are costs that remain constant regardless of sales levels. For example:
Step 2: Determine Your Products or Services by Profit Centers
Profit centers are the units or divisions in your company that can be separated out by revenue and expenses, allowing you to see if each generates income or losses.
For example, if you offer a product, a service, and a subscription base, each of those would be separated for your analysis.
Step 3: Calculate Your Average Per-Unit Sale Price
The per-unit sale price can be calculated for both products and services. For example:
- Chiropractors can use the average adjustment fee.
- Attorneys and accountants can use the average per hour fee.
- Product sales can be calculated using the average price for each product line.
Step 4: Put it all together
- Using the data collected, you can determine if your prices are too low compared to the marketplace. Maybe your cost of materials/labor is too high. Are there adjustments you can make with your supply chain or equipment to bring costs more in line?
- Launching a new product can be exciting, but do your homework first. Understand how much you need to sell to offset the cost of the new product expenditure. How long will it take for the new offering to be profitable?
- Does your business have seasonality and does that affect your break-even points? If your product or service has a specific shelf life or seasonality, your break-even calculations could have varying pricing points throughout the year.
- Analyze your best sellers to determine if you can reduce costs, create new markets, or should invest in more advertising.
- Maybe you will discover a product or service with a low-cost basis that you can put more effort toward to increase sales.
- Use the analysis to incentivize your sales team. Set goals and create incentives that align with higher performance after the break-even point per month.
How Does This Help with Growth?
Using the break-even analysis will also help you make informed decisions on your growth goals. You can establish realistic expectations of where you need to increase prices, cut costs, or expand your sales. Just because you need to sell more doesn’t mean you can. This information is just the start of developing your strategic goal setting for the current year and into the future.
Bring in your CPA and advisory team as you deep dive into your business's financial picture. Once you have the analysis complete, enlist your management team to help you set goals based on the data you have gathered.
Analyzing your break-even points is not a one-and-done process. As you make additions to products or services, consider sunsetting certain offerings, add distribution channels, or are looking to add more overhead, a break-even analysis will help you understand the financial impact of those pending decisions.
SVA can help you create a break-even analysis and set strategic goals. Give us a call and let’s talk about how we can help your business become more profitable.
© 2022 SVA Certified Public Accountants