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Report name: Sample Forecast

Break Even Sales and Profitabilty

The blue line in these charts indicate the break-even point at which accrued sales (excl VAT) begin generating a net annual pre-tax profit.

 Actual Sales vs Break Even Sales Year 1
 

Actual Sales vs Break Even Sales Year 2

 Actual Sales vs Break Even Sales Year 3

How to Read the Break-Even Charts

Accrued sales (blue) needed to break even as opposed to actual sales (red) are recorded by these charts.

The difference between the two illustrates the progress of profitability or otherwise over the course of the year. The fact that operating profit is a key component of operating cash flow makes these charts important in respect of planning.

They are especially important to seasonal businesses, for example those engaged in the toy or gift trades, where Christmas is their peak selling period. Ideally planning and forecasting business activity should include setting a target for the month by which actual sales begin to exceed break-even sales. The principal factors when it comes to achieving that target will be overheads and gross profit margins.

Managing Seasonal Overheads

The principal causes of break-even deficits are the overheads. Decisions that call for reducing overheads however calls for planning well in advance.

It can take time for action to reduce overheads to show constructive results, especially where the overhead is concerned with the wage bill. That calls for accurately forecasting the consequences of overheads on liquidity and cash flow throughout the year or years ahead before setting acceptable overhead targets. For a heavily seasonal business, outsourcing and the use of temporary or agency staff to support peak trading periods is usually the best way to go.

Break-Even Profits and Cash Flow

The months that are below or close to forecast break-even sales should act as a signal for reductions in current assets.

Although by definition a seasonal business will expect its stock of merchandise to be at its lowest following the end of the prime selling period, the bulk of any peak selling items carried over from that are best considered for jobbing or closing out as early as possible.

Such lines can always be replaced at the appropriate time but if cash flow becomes a problem during the quiet trading period, that can be much more difficult to come by.

Another issue that should be considered when planning the year to come is the timing of long term investments as asset financing only mitigates part of the cost to liquidity when acquiring new fixed assets. It should also be remembered that while dividends do not affect the break-even charts the fact that appropriate profits have been made in the past will not help if they result in negative cash flows in the future.

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