Observe the variable percentage relationship of the EBITDA (Earnings before interest, depreciation, and amortization) to total revenue. (In the example, this is forty percent (40%). Divide the total “fixed expenses” ($3.9M in the example) by the EBITDA percent to compute the company’s break-even revenue level with the current “fixed expenses” in place before adjustment. Once that is accomplished, the next step is to aggressively review every “fixed” expense to see what portion is partly discretionary and should be reduced.
The second step in this restructuring effort is to reduce those expenses and reassess the lowered break-even point. If this new level still exceeds the anticipated revenue and gross margin projection, more work is indicated, both to gain revenue to bounce faster and to change the operation to further reduce the break-even point. To emphasize this major action, let us look at the situation for this example company. If the projected revenue for the next six months is going to be at a lower annual revenue equivalent of only eight million dollars ($8M), more action is required.
This projection should, in turn, prompt the owner to figure out how to reduce the “fixed expenses” down to three million two hundred thousand dollars ($3.2M). This is how the analysis affords the business owner the information required to re-plan operations. Achieving a “cash flow break-even” position will buy you time and give you some peace of mind as you work toward the larger “bounce back” for your business.