Dr. Is In : Think Globally, Act Locally

It's wise to rethink the meaning of "break even"

October 2009 By Leslie Shiner, Owner, The ShinerGroup

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While I was teaching a class at CEDIA EXPO last month, I introduced the topic of breaking even. I mentioned that the last article in my column in CustomRetailer was about breaking even. One attendee (let's call him Bob*) turned to me and said, "Yeah, I know all about breakeven! I just finished one of those really horrible jobs, but I was lucky because after all was said and done, I broke even!"

When I asked Bob to elaborate, he went on to explain that even though he didn't make any profit on the job, he was able to invoice the client enough to cover all the job costs. Therefore, he thought he broke even. But did he?

Let's look at some numbers. Let's say you have an average job of $50,000 that you are able to sell with enough markup to achieve a 35 percent gross margin. (A 35 percent to 40 percent gross margin is often quoted as a standard for this industry. But be careful—do not confuse markup with margin, see CustomRetailer, June 2009). And since you also keep a tight reign on your overhead costs, you are able to achieve a 5 percent net profit. Sounds good, right? If you only did one job, this is what your Income Statement would look like:

One Good Job

Job Income $50,000 100.0%

COGS 32,500 65.0%

Gross Profit 17,500 35.0%

Overhead 15,000 30.0%

Net Profit $2,500 5.0%

If you duplicate this process, and produce five jobs this way, you'd make a gross profit of $87,500 and a net profit of $12,500. But then, what happens when you have one of those nightmare jobs—the one where nothing goes right, you can't please the client, and you are trying as hard as you can just to finish the job and run away as fast and as far possible. This is the job that Bob described. But then, he said that he felt lucky because he was able to recover all his job costs, and break even! So, in this example, if the job cost $50,000 and he was able to receive $50,000 from the client, you might agree with Bob that he dodged the bullet.

But the problem with this thinking is that Bob wasn't looking at the big picture. He is looking at each individual job, not his company as a whole. He didn't realize that this one bad job has literally wiped out the profit the he has earned from the five previous jobs. See chart above.