Did you have a piggy bank as a kid? A place where you would keep your extra change and birthday money and save it for something special? We still need this as adults! At the end of the day, do you know whether or not your company is breaking even, making money, or losing revenue?
Are You Making Enough Money to Break Even?
When it comes to accounting and business, there is something called the breakeven point. This is the point where expenses and income are equal and there is no profit or loss. Ideally, we get into business to make money, but sometimes a company will barely break even and even more commonly, a company will experience loss and need to borrow money.
That is why it is important to have a financial expert run a breakeven point analysis to help you discover ways to cut costs or increase revenue so that you can stay in business without succumbing to debt.
Sometimes the best course of action is to rely on finance and accounting outsourcing to help keep your finances in good shape. Using your business accountant will not get you the complex analysis you need to ensure your company can reach the breakeven point.
Founder of Costa Consultants, Kathryn Gordon, is a financial advisor living in Costa Rica. She earned her MBA from Crummer Graduate School of Business in Winter Park, Florida in 2012 and studied at INCAE Business School in Alajuela, Costa Rica after double majoring in college with degrees in Biochemistry and Molecular Biology. During her MBA, Kathryn focused on entrepreneurial finance and successfully raised millions in capital for sustainable businesses, charter schools, non-profit organizations, and biotechnology firms, ultimately earning her the honor of #1 Entrepreneur of her MBA class.
Kathryn says she sees what looks like successful businesses on the outside struggling when any additional expenses showed up.
“For example, business owners in Costa Rica have to pay their employees something called Aguinaldo every December. It is essentially a Christmas bonus worth an entire month’s salary,” explains Kathryn. “Even though business owners know this is coming every year, many owners struggle to come up with this additional money, even when their business is doing well. It comes down to proper financial planning and that is something that is missing from even businesses that appear to be doing well on the outside. This is why it is crucial to determine your breakeven point as a business owner, so you do not end up scrambling at the end of the year.”
A business needs a dollar figure in order to determine its breakeven point. This can be converted into units (products) by calculating the contribution margin after deducting the variable portion of the company’s costs. This calculation is one way to show the profit potential of a particular product offered by a company and shows the portion of sales that covers the company’s fixed costs. Any money that is remaining after covering fixed costs is the profit generated.
The information required to determine a company’s breakeven point can be found in its financial statements. This is where professional finance and accounting outsourcing comes in.
A financial statement shows all of the financial activities of a business – a financial record of any and all transactions the business has done during a set time.
These statements are very useful because they document your income and expenditure. This is vital in the event of an audit by a government agency, keeping records for tax purposes, and for possible investors. Financial statements are especially vital for reviewing your business to determine what it needs to move forward successfully.
A proper financial statement will help you determine where you can cut back on expenses, from where you earn the most money, if your business model is sustainable, and even if your marketing campaign is working.
There are three financial statements to focus on as a business owner:
- Balance Sheet – A balance sheet is like a snapshot of your business’s assets, liabilities, and any shareholder equity on one document. It typically focuses on the tax year. Your assets are cash, cash equivalents, accounts receivable, and inventory value. Your liabilities are any debts, wages payable, and dividends payable. Reviewing your balance sheet is the best way to determine your business’s overall health. It is like an annual check-up.
- Income Statement – These statements focus on a different reporting period than the balance sheet. These can be monthly, quarterly, or annually. They account for your total revenue, total expenses, and net income. Your revenue will be the total value of all the sales you have made during that particular period. Your expenses are all outgoings from your business account for the same time period, such as administrative expenses, operational expenses, etc. Your net income is the revenue minus the expenses and taxes.
- Cash Flow Statement – The cash flow is the movement of incoming and outgoing money from your accounts. It will tell you whether or not your business is generating enough cash flow to pay your expenses and debts.
Financial statements let you see how your business is performing in the past and present but there are ways to see how your company will do in the future and this is where finance and accounting outsourcing will really come in handy.
Pro Forma Statements
Pro Forma Statements are a method of calculating financial results using certain projections or presumptions. This type of financial statement is not calculated by using generally accepted accounting principles and usually leaves out one-time expenses that are not part of normal company operations, such as the one-time purchase of equipment.
These statements can be used to help business owners make decisions about the future, such as whether or not to expand or they can be presented to potential investors.
It’s surprising how many businesses go on year after year without breaking even. Any company that knows its numbers inside and out has a better chance of coming out ahead.
Keep track of your cash with finance and accounting outsourcing. Let Costa Consultants build the numbers, so you can really get to know your business, and plan ahead for the future.