By calculating your dealership’s breakeven point, you can accomplish more than just learning whether your business is above water. The process can help you monitor various aspects of your operation and grow your business with confidence.
Defining the breakeven point
“Breakeven” is the point at which your total sales are equal to your total expenses. It’s the minimum revenue volume your dealership must generate to avoid a loss.
To calculate your breakeven point, you need to understand a few terms:
Fixed expenses. These are the expenses that remain relatively unchanged with changes in your business volume. Examples: property taxes, salaries, insurance and depreciation.
Variable and semifixed expenses. Your store’s sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples: commissions and new-car delivery, policy work, supplies, advertising and training.
Contribution margin. You can determine this margin by calculating the difference between revenue and the variable expenses associated with that particular income. Example: gross profit less any sales commission.
Working the calculation
You’ll need some key data about your dealership, but the breakeven point isn’t complicated to calculate: breakeven = fixed expenses / (contribution margin / sales).
Let’s look at an example based on the following annual figures for a store:
Annual breakeven = $750,000 / ($1,000,000 / $10,000,000)
= $750,000 / 0.1
Monthly breakeven = $7,500,000 / 12
The denominator is the contribution margin percentage of 10% ($1,000,000 / $10,000,000). So, you can simplify the breakeven calculation to: breakeven = fixed expenses / contribution margin percentage.
As long as your expenses stay within budget, your breakeven point will stay reliable. In the above example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $750,000. If you change either of these variables, your breakeven point will change.
Recouping an investment
Breakeven analysis also can tell you the amount of sales you need to recoup an investment. Suppose that your dealership has been performing a lot of custom jobs for customers. Your service manager sees an opportunity for custom exhaust work and wants to purchase a machine that can bend stainless steel to create custom exhaust systems.
Next assume the machine costs $12,000 (the fixed cost), and variable costs (labor, materials and commissions) for custom exhaust work are $65 for every $100 of revenue. Therefore, your contribution margin percentage is 35% ($100 – $65 = $35 contribution margin; $35 / $100 = 0.35). The annual sales of custom exhaust systems needed to break even on the new equipment would be about $34,000:
Breakeven = $12,000 / ($35 / $100)
= $12,000 / 0.35
Measuring the impact of a cost reduction
Assume the same figures from the first example above, except that you have an opportunity to reduce fixed computer system costs by $20,000 per year:
Breakeven = ($750,000 – $20,000) / ($1, 000,000 / $10,000,000)
= $730,000 / 0.1
Prior breakeven point $7,500,000
With cost reduction $7,300,000
Reduction in sales to break even $ 200,000
In this example, a fixed cost reduction of $20,000 decreases by $200,000 the amount of sales your dealership needs to break even. Such a cost savings could be a real boost in a slow sales year. Another, easier way of calculating this is by dividing the cost savings by your contribution margin percentage: $20,000 / 10% = $200,000.
You can use breakeven analysis individually in all areas of your dealership, including new and used car sales, parts and service, and finance and insurance. Talk to your CPA to see how this relatively simple calculation can enhance your business planning.