Knowing your break-even point

A small business owner learns the importance of knowing his break-even point

Knowing your break-even pointNico Jano runs a waste management business in Pofadder in the Northern Cape which in his words is “making some money”. He is now in a position where he needs to start managing his finances in more detail and to build a cushion to protect his business during difficult economic times.

“The prospects for increased business are good. I just want to know how to draw a proper budgeting plan for the business in order to handle my financials better. I also want to know how much money I should start putting away for those dark days when business is not so good,” says Jano.

Jano originally started his business in 2003 while he was still working and only moved into the business full-time six months ago.

He noticed a gap in the market for waste management in the construction industry, as well as portable toilets, as no one was offering these services in the area.

Jano now has four permanent employees and contracts to a number of large businesses where he is the preferred provider of waste management.

“Jano has identified a niche market and it is working for him,” says Riana Grobler, Senior Marketing Consultant for Small Business at Old Mutual. Grobler says it is clear that Jano has a good understanding of budget plans as well as the running of a business.

“It is very important for him to create an excel spreadsheet which he can update daily regarding his expenses and income. The daily income vs expense spreadsheet will assist him to determine his break-even point,” says Grobler who explains that the break-even point determines which day of the month you are beginning to show profit – for example on the 5th or 22nd day of the month.

“The earlier you get to your break-even point, the quicker you show profit and the easier you can sleep at night,” says Grobler.

Grobler says in terms of saving money, Jano should start with saving five percent of his profits as a hedge against bad months. He should then build this up to ten percent and invest a portion for longer-term growth.

  • Emergencies: For short-term cash flow emergencies, one should use an account that is easily accessible such as a money market account. Grobler advises that a portion of the money should be in a 32-day account so there is no temptation to access the money for non-emergencies.
  • Growth: For longer-term savings, unit trusts are a good option as you can still have easy access to your money, however this should not be the reason to invest as you want to grow your savings for the future in order to expand your business. Unit trusts start at between R200 and R500 per month so are accessible for small businesses.
  • Retirement: Generally a small business owner does not belong to a pension fund; therefore Jano should consider a retirement annuity to save for his retirement and take advantage of the tax deduction against his income. A mistake many small business owners make is to consider their business as their sole retirement plan. This is a risky strategy as the market conditions may not be conducive to selling the business for a significant profit when you are ready to retire.

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