Why Lowering Your Breakeven Might Not Be the Answer

IN THIS ARTICLE

→ What is Breakeven Explained Simply?
→ Why Is Breakeven Important?
→ What Breakeven Benchmarks or KPIs to Aim For?
→ What’s the No. 1 Takeaway from this Article?
→ Why Lowering Your Breakeven Might Not Be the Answer
→ Shifting the Focus: From Cost-Cutting to Value Creation
→ Investing in Growth: The Aggressive Approach to Breakeven
→ How to Make Every Dollar Work Harder
→ From the Founder: “Get Aggressive With Your Breakeven”
→ Conclusion: Using Your Breakeven for Strategic Decision-Making

Understanding Breakeven

EXECUTIVE SUMMARY

• Breakeven is the point at which total costs and total revenue are equal, indicating your business isn't losing money or making a profit. (That is, there are no net losses or gains.)
• The true purpose of your breakeven is not as a figure to minimise, but a benchmark for business performance.
• Effective breakeven management helps businesses make informed decisions on where to allocate resources to maximise profit.
• Instead of simply trying to lower your breakeven point, aim for a consistent or improving gap between revenue and breakeven, and track ROI for different strategic investments.

What is Breakeven Explained Simply?

Breakeven is the point where your total costs and total revenue are equal, indicating that your business is neither losing money nor making a profit.

Why Is Breakeven Important?

Managing your breakeven point effectively is important because it determines the sustainability and growth capacity of your business.

Effective breakeven management also helps businesses make informed decisions on where to allocate resources to maximise profit.

What Breakeven Benchmarks or KPIs to Aim For?

Track metrics like breakeven point adjustments, cost-per-acquisition, and return on investment (ROI) for different business activities.

The No. 1 Takeaway

To improve your breakeven, ditch the cost-cutting. Instead, make aggressive (but efficient) investments to widen the gap between breakeven and revenue.

Why Lowering Your Breakeven Might Not Be the Answer

In the drive to boost profitability, many business leaders instinctively look to cut costs. It seems straightforward: reduce expenses to improve the bottom line. However, this strategy can often lead to unintended consequences that may prevent growth rather than foster it.

In this article, we challenge the traditional view of managing breakeven points, highlighting why simply reducing costs isn’t always the right approach – and what you can do instead for better business performance. 

Shifting the Focus: From Cost-Cutting to Value Creation

The traditional approach to lowering the breakeven point through cost reduction is too narrow and often counterproductive. A more dynamic strategy involves understanding how to increase value with each dollar spent. This means investing in areas that directly contribute to higher revenue and profit margins, even if it raises the breakeven point temporarily.

Instead of cutting staff or marketing expenses, consider how increasing these budgets could lead to greater market penetration and higher sales. Evaluate your current expenditures to identify which areas have the potential for a high ROI if further invested in, such as digital marketing or new product development.

Key takeaway: Investments that seem to increase costs in the short term can lead to higher profits by boosting operational capacity and market reach.

Investing in Growth: The Aggressive Approach to Breakeven

Taking an aggressive approach to managing your breakeven point means being willing to accept a higher threshold temporarily for potential greater gains. This involves calculated spending in growth-driving activities and being bold in financial strategies to capitalise on untapped market opportunities.

Strategic Spending

Understand where additional spending could lead to exponential growth. This might mean hiring additional sales staff or increasing advertising budgets.

Evaluating Opportunities

Analyse market data to identify growth opportunities that justify a higher breakeven point.

To implement this, create a plan to test targeted increases in spending in high-opportunity areas and monitor the impact on both breakeven and overall profitability.

Key takeaway: A higher breakeven point is acceptable if the potential for revenue growth is proportionately greater.

How to Make Every Dollar Work Harder

To truly benefit from a strategic approach to breakeven, it's crucial to ensure that every dollar spent works as hard as possible. This means optimising current investments and continuously seeking efficiencies that contribute to both lowering costs and increasing value.

The 'polite pressure' strategy is to regularly review all business investments for their efficiency and output. Ensure that each element of your spending is justifiable with clear ROI. Also, leveraging technology by implementing solutions that enhance productivity and reduce waste.

To implement this, audit current business processes and investments to identify areas where efficiency gains could lead to better financial outcomes.

Key takeaway: Efficient management of expenditures ensures that your business operates effectively within its breakeven constraints.

“Get Aggressive With Your Breakeven”

“When we sit down with people each month and tell them where their breakeven is placed, as at this point in time, what's the mindset around that breakeven?

Sometimes people's instinct is to want to reduce their breakeven down.

But in general, do you know what we find?

That when you cut costs, there isn't really a great degree of change to your breakeven.

Your breakeven might go from $470,000 per month down to $440,000; but at the same time you've found that you've crippled yourself with, 'I've had to remove this person. I've had to remove that.' You're actually hamstringing yourself to achieve that lower breakeven.

Therefore, as a thought exercise, what we get people to do is - let's put the shoe on the other foot, and get really aggressive.

What do we mean by getting really aggressive?

It means we potentially increase our breakeven, but it's to give ourselves the greatest opportunity of improving the gap between our breakeven and what our actual revenue is.

Remember, the purpose of breakeven is not to minimise it; it's to give us the benchmark of what we need to achieve - as a minimum - before we start earning as a business.

What if there was a way that I could increase my breakeven to $490,000, but were actually capable of as a business to all of a sudden do $610,000 worth of revenue a month?

That is naturally a far better equation for our business.

How do we do that?

Firstly, you've got to put what I call polite pressure on the existing investments you already place within your business.

So you are increasing your efficiency for all your investments. And the lion's share of that is going to fall around people; advertising and marketing; staff training; consultants and advisors. People who can have an exponential return relative to the investment they place in your business.

If you look at things like electricity, telephone, computer expenses... even if you eliminated them, they're not really moving the needle in the grand scheme of things.

The other side of the equation, as I said a moment ago about being aggressive with your breakeven, is to - do we employ an extra salesperson? Do we do that extra marketing campaign?

So long as we're efficient and thoughtful in the way we execute these investments.

And the reason I say efficient is we want to make a dollar investment to get a $2 return, a $3 return. That's the sort of efficiency we are looking for when we're making those outlays.

An example: someone we were talking with, they have a regional-based sales team. And we said, 'Well, why don't you get extra salespeople in a different region as well?' They know that different region is an opportunity, that's an untapped market for them, and that's going to increase their breakeven.

But we looked around the room and they all said, 'Gosh, there's just so much opportunity.' So that business has increased their breakeven; but their ability to earn has increased, I wouldn't say exponentially, but it's increased significantly. So think about that in your business.

Yes, you can cut and yes, I'm not saying this just to be all kind. We have worked in scenarios where you do need to cut people and you do need to cut costs.

But also, think aggressively: 'How can I grow and get $1 purchases that create $4 worth of breakeven revenue?'

Conclusion

Using Your Breakeven for Strategic Decision-Making

Understanding and strategically managing your breakeven point can transform it from a static financial metric into a dynamic tool for business decision-making. By focusing on creating value rather than merely cutting costs, you can position your business for sustainable growth and profitability. Remember, the goal is not just to reduce your breakeven point, but to optimize it in a way that supports your business’s long-term strategic objectives.

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