I thought my
entrepreneurial friends might find it helpful to review the look-up table above, which tells you – the maximum reduction in sales before you lose money:
First identify your company on the table by your Gross Margin and your Net Margin (after fixed costs) e.g. say you make 80% Gross Margin and 15% Net Margin, on an annualized basis, your sales could drop 18.75% and you would still breakeven. Proof, Sales are say $50m, reduced to $40.525m, GM now $32.5m, FC were $32.5m, still breaking even. It basically shows you that in high fixed costs businesses you can’t afford to lose too many sales or of course you need to cut that breakeven-point down to size!
I find it’s always useful to understand just how sensitive your business is to fluctuations in sales. This is especially true of software businesses where high operational gearing means that once you’ve set up your infrastructure you can really scale quickly and turn in some great margins.