I believe that we all are interested in improving our bottom line.  A healthy bottom line means that we can do more for our families and others around us.  It may mean that we can hire employees or give a donation to our favorite charity.

So how can we improve our bottom line?  There are several good financial tools that can help any business.  One is simply coming to understand your breakeven point.  Some of you might be asking "what is a breakeven point?"  Breakeven is when total gross sales is equal to total expenses.  In other words you're hard work has created enough sales to meet all of the expenses but no more.  Not exactly the place most of us want to be.  Understanding the dynamics of this situation though can give you powerful tools for improving your bottom line.

A breakeven analysis accomplishes several things.  It helps the company better understand the nature of its costs and expenses.  It also attempts to somehow unitize this information.  Unitize is a way of generalizing information on a unit basis where possible such as hours billed, products sold, or other meaningful units.  For some this will become more complicated because you have several different hourly rates and/or sell many different units at various price levels.

Understanding the nature of your costs and expenses

Costs and expenses can be classified as either variable, fixed or some mixture of these two.  A cost is variable when it is generally fixed on the unit level but increases when more units are sold.

An example:  Your company pays a technician $30/hr for work that is be charge to your client at say $95/hr.  The employee's wages would be a variable cost because it will vary depending on how many hours are used on the service.

Cost can also be fixed.  This means that generally speaking the cost will not change over the course of a month even when no product or service is performed in the period.  If very few products or services are sold then on a unit basis these fixed costs would be quite high, but if many units are sold then these fixed costs are comparably low.

An example:  The rent paid for an office space is a fixed cost.  Often there is a set price to be paid monthly regardless of how much of your product or services are sold.  Obviously rent becomes a big burden if sales are low

Mixed costs share elements of both of these types of costs and generally take more time to understand.  Utility bills often have a basic charge and then have additional charges for usage.

When your costs have been classified properly a basic formula can be used to work out what the breakeven point is.

The basic formula: Breakeven point = Total Revenue (Sales) - variable costs - fixed expenses = 0

Revenue minus variable costs is also called the contribution margin which is another important concept in making use of this formula.  Contribution margin gives us the net revenue per unit available to pay all the fixed costs of the business.

The formula changes to: contribution margin - fixed costs = 0 or contribution margin equals fixed cost.

Example:  A sole practitioner acts as a business consultant charging $125/hr.  He or she pays themselves $30/hr and these are the only variable costs.  The contribution margin would be $95/hr.  If they have determined that all other costs are fixed and these costs add up to $7,500 per month then anything over 79 hours of billable time will produce a net profit.

This is a simplified example which we can use now to look at ways to improve the bottom line.  This basic illustration gives us some information that can help us improve our bottom line.  This business owner may have determined that it is necessary to spend at least half of their time marketing or networking and they must also spend some time in administration.  It is clear in this situation the individual needs to work more than forty hours a week in order to breakeven.

Three variables can be changed with varying consequences.  It may be possible to charge more per hour.  Things can be done to increase billable hours.  It may also be possible to reduce some of the fixed overhead costs.

Charging more per hour may be a good strategy for new clients, but quite likely would not be wise or possible for current clients.  This approach requires a better understanding of the market and may require repositioning the business.

Another solution may be to consider how to increase billable hours.  This could be done by hiring someone to market the business freeing up time for the owner to consult more.  The owner could also consider working more hours.  If the owner is cleaning his or her own facility maybe it makes sense to hire someone to clean.

A careful examination of costs can also be done to look at how cost savings could be implemented.  It may be possible to reduce rent; there may be ways to reduce utility expenses or other costs.  These decisions are usually more difficult, but may make practical sense in some cases.

This is but one tool, but it can be useful in understanding some of the options available to a business.