I am amazed by the number of concrete producers who have never calculated one of the most important indices in running a concrete business: How many yards do I have to produce to break even?
In a year when the housing slowdown has put a crimp on volume for some producers, it is a topic I have been discussing and promoting widely, and is worth studying.
The Break-Even Point is the point where expenses or costs equal revenues. Quite simply, it is the inflection point when a concrete business neither makes money nor losses money. Calculating the company's Break-Even Point allows a producer to understand the following key questions:
- Are fixed costs in line with the volume and revenue structure of my business?
- How many yards of ready mixed concrete does my business need to sell to pay for its fixed costs?
- How much revenue does my business need to generate to pay for its fixed costs?
- When can my business bid projects more aggressively and still add profits to the bottom line?
To calculate the Break-Even Point in dollars, we use the following formula:
Total Fixed Costs ÷ (Gross Profits ÷ Revenue)
Gross Profit, also known as Marginal Contribution, is defined as revenue minus all variable costs. To calculate the Break-Even Point in cubic yards, just substitute cubic yards for revenue in the formula above.
Variable and fixed costs
To calculate the Break-Even Point, you must understand the difference between variable and fixed costs. Variable costs are directly associated with producing and delivering concrete, such as raw materials costs, variable delivery costs, and variable plants costs.
Examples include drivers' wages and benefits, repairs and maintenance costs for ready-mix trucks (including parts, oil, mechanics' wages, and benefits), tires, and fuel costs. Variable plant costs include wages and benefits for plant managers, batchmen and yardmen, repair and maintenance costs for concrete plants and yard equipment, utilities, and waste concrete disposal.
Fixed costs are other delivery and plant costs that are not included in variable costs, as well as all Selling, General & Administrative expenses. These include depreciation for trucks, truck lease costs, salaries, wages and benefits for dispatch and order-taking personnel, and vehicle license, registration and insurance.
Fixed plant costs include plant and equipment depreciation, plant and equipment leases, quality control costs (including salaries and benefits), real estate taxes, environmental costs, and information technology costs related to the batch plant.
If a business is not profitable in any given month or over several months, calculating the monthly Break-Even Point can tell you how much more revenue is required to cover fixed costs each month. Alternatively, it will point to the need to examine the fixed costs structure if growing revenue is not a realistic option.
But more importantly, if reducing the selling price is the only way to increase volume, this can be a drastic mistake, because the Break-Even calculation changes along with the reduction in gross profit.
The Break-Even Point also can determine how aggressively a business can pursue new jobs. Since fixed costs are fixed, there comes a point during the fiscal year when enough revenue and gross profit have been generated to cover fixed costs for the remainder of the fiscal year. At that point, the gross profit from the sale of each additional cubic yard of concrete falls directly to the bottom line.
Calculating the Break-Even Point helps producers understand how much revenue the business needs to generate to be profitable. It can also be an important tool to guide the sales force in its pricing strategy.