Blue Elevator Blog

The Break-Even Model

Welcome to an article on the Break-Even Model.  If this is your first Blue Elevator® “break-even” article, I would invite you to read a primer article: Break-Even Point.

Break-Even Point

In the aforementioned article, we discuss the “why” and “what” behind this important concept.  And, in this article and the ones to follow, we will discuss “how” to calculate it.

Your Custom Personal Break-Even Model

For as long as I have been in business, I have always built and used custom break-even (BE) models.  And, I would encourage you to do the same.

Here are my thoughts:

And, for simplicity, from here on out we will refer to this as the BE Model.

• Every organization is different.  No two people are alike.  And, no two organizations have the exact same cost structure.  Therefore, no two BE Models will look the same.
• For as long as I have been observing business and providing business advisory, I have learned an important take-away: People, clients, executives, etc. don’t use tools they don’t know how to use.  Needless to say, if you build it, you will better understand it.
• There is another phenomena: Unless and until someone invests, the likelihood of follow-on usage is very low.  So, if you build it, you will hopefully use it.
• I have often thought about building a template, but there are so many variables to consider.  The template may be more complicated than the task deserves.  In other words, building your own from scratch is simpler than wading through a template someone else built.

Taken all together, no one will undertake a project they don’t intend to use.  And, the very act of creating the BE Model is revelatory in and of itself.  This means that unless you build it, you probably won’t use it.  And if you’re not intending to use it, why build it?

Make sense?

So, Let’s Build a BE Model

The whole idea behind a BE Model is to calculate the amount of “realized” cash flow your organization needs to survive.

As I often say, there is a difference between simple and easy.  They aren’t synonyms.

Creating the BE Model is a simple process.  But, alas, it isn’t always easy.  That’s why I’m writing these technical advisory articles.

Outline For Building Your BE Model

Step 1: Calculate your Gross Margin or Contribution Margin for your goods and/or services.

Step 2: Next, identify all of your Below the Line costs.

Step 3: Then, identify any and all Balance Sheet accounts whose activity affect cash flow.

Step 4: Combine all of the above!

Are You Ready?

If you’re ready and up to the challenge, we will systematically wade through each step in the articles to follow.

Feel free to contact us at any time if you need help or insight.

Click on the link to go to the next article: Calculating Gross Margin.