The Most Important Picture Every Small Business Leader Needs to Have in Their Head At All Times.
The Worth of a Picture that Can Put Your Mind at Ease
When it comes to running a small business, the adage “…a picture is worth a thousand words” can be a simple, yet powerful idea if leveraged in a smart way.
What might be a single picture that symbolizes your company’s performance and health? Is that picture burned in your mind to be accessed at instant recall? As your business changes day-to-day, month-to-month, do you have a sense of how the picture is changing? What would you give to have a picture in your head that would tell you everything you really needed to know about your present financial position and your future prospects. What would that peace of mind be worth?
A Special Financial Analytical Tool
Did your breakeven graph come first to mind?.....
For many business leaders, memorizing numbers on financial statements doesn’t come natural, and even if you do have the mind to recall the numbers, how are they to be interpreted dynamically with a changing business environment?
When used consistently as a financial tool, a breakeven graph can powerfully tell you:
Your fixed costs (things you have to pay for without invoicing a dime)
The relationship between variable costs and revenue dollars
The revenue amount needed to move from the “red” to the “black”
EBITDA expectations for business revenue beyond the breakeven point
As your business environment is dynamically changing and you respond to new situations, an update to the breakeven analysis will again put you at ease over what the future can look like when incorporating the changes. (Represented by dotted lines in the sketch)
Preparing the Underlying Financial Analytical Model
Common financial software packages do not parse financial data in a convenient way to directly construct breakeven graphs in a straightforward manner. Typically, the following steps are needed to prepare the data for consolidation:
Restructuring financial reporting data for proper segmentation
Some historical analysis to ascertain the ranges of fixed costs and variable costs as a function of revenue streams
Comparison of previous financial reporting results to validate the model
Potential Enhancements
In the event end of year book entries are predictable, these can be incorporated into the analytical model to report end of year Profit/Loss
The ranges from the historical analysis can also be used to enhance the graph if variable costs are less predictable than desired
The graph can be a combination of historical and baselined data for any given time period. Incorporating this tool into the financial reporting suite can serve to easily track your business environment.
If picture naturally stick in your head, reviewing a monthly breakeven graph might be the best way for you to get comfortable and offer some peace of mind for your ever-changing world.