Next Level Thinking: Knowing Your Break-Even Levels

New John Ellsworth
John Ellsworth of Success Strategies

Do you know the break-even levels for your business today? If not, you may in trouble. Not because of today’s low milk prices, although those aren’t helping. The root cause of this trouble is that, without knowing these break-even levels, you are “flying blind.” You may currently have a cash flow challenge, but, worse yet, you cannot fix it because you won’t know if and when it has been corrected.

Please allow me to start by defining break-even levels, as I view them. They are the level at which, if all your other factors remain the same, you’ll break even on your cash flows. For example, if you are running a gymnastics class and are losing $100/month, you will need to sell four more memberships at $25/month without incurring any additional costs, or perhaps you’ll need to sell five more memberships to pay for the $25/month advertising that you need to run to generate these added sales.

Similarly, on a dairy operation that is averaging 71 lb/cow/day, but whose break-even production level is determined to be 75 lb/cow/day, you will need to increase production by four pounds per cow per day, while keeping all other revenue and expense items the same. This is a tall task, no? Well, yes, it is, but do you want to win or not? There is a distinct possibility that we cannot get the 4 extra pounds of milk at zero cost. However, what if we spent $0.25/cwt more on feed and then, because of increasing our production levels, were able to lower our other costs/cwt (labor, insurance, etc.) enough that we were then above break-even? Perhaps there are other costs that can, indeed, be reduced, too. Please look at everything.

I had one dairy Client who had 800 cows, ran a 40% cull rate, could not expand and yet maintained 975 heifers. By simply reducing the number of heifers he was raising, his heifer costs were reduced to a more reasonable level, allowing him to then make money.

This is the entire point of completing your break-even analysis. You just don’t know unless you do the budgeting and break-even analysis with comparisons to your current actual levels. Cutting costs is not always the answer, as learned by some who tried to do so in 2009 with negative consequences. However, if your feed costs increase 3% and yield a 6% additional return, chances are good that you’ll eventually achieve break-even status.

The tools to calculate your break-even levels are available to subscribers at our website www.success-strategies.com under the section entitled “Financial Techniques.” If you’d like to listen to a presentation I recently recorded on YouTube,click on the video below:

 

John Ellsworth of Success Strategies offers financial consulting to dairy and farming enterprises across the U.S.  He may be contacted by email at [email protected] or by phone 209.988.8960.  More information is available at www.success-strategies.com