What is your robustness number? How is it trending?
Lately, I have heard leaders considering the next recession and how it might impact them. Rightfully so, this is a critical topic leaders must consider. But maybe, it would be better to work at it every day. How? Watch your “robustness number”!
What is the robustness number? This is a single number that represents the level of sales decline you can withstand before hitting breakeven. Plotted on a monthly or quarterly basis you will see if your trend is up or down. Traffic signal colors can help. For example, if your number is 15% or higher then you are in the green zone. A number in the 5-14% is yellow and below 5% is red; feel free to adjust for your preference.
Before getting into the calculation let’s put this into perspective on why this is so powerful.
Scenario A– your business is flourishing in a good economy, you have increased your investment in new trucks and equipment, added staff and are seeing great profits. What could possibly be wrong with this situation. Absolute numbers can fool you. That profit costs more to generate today. You now have increased fixed costs from insurance to wages, to maintenance, office supplies, etc. If the economy slows, those costs do not go away. In this scenario, the robustness number likely fell into the yellow zone. Being yellow just means you have less margin and should prompt a close review your expenses.
Scenario B– your business is up over 10% in revenue. You have decided to leverage your team with some added tools / equipment, and increased overtime while you work to enhance your business processes. Here this business is leveraging their resources to the fullest and their robustness number is rising likely well into the green. In the event of a slowdown, they can reduce hours and explore new opportunities. The investments were likely paid off quickly due to the increased profitability of not ballooning their fixed costs.
You see costs can creep into your business so quietly that you do not even realize that they are there. Its little things like better uniforms, a larger trash dumpster, another water cooler and so forth. It happens and you just need to be wary as they can hurt you. If you already knew this because your CFO has discussed it with you then count yourself lucky.
The calculation is really pretty straight forward. First calculate your breakeven sales number; recognizing that variable costs (material, staffing, etc.) are reduced as sales decline. Next divide your current sales level by your break-even number. The result is your robustness number. Depending on your business either monthly or quarterly is recommended. For more help on calculating the number see our reference page.
Real life- in October of 2008, while leading a manufacturing company with a robustness number of nearly 25%. We were just completing an expansion and the purchase of some significant capital equipment. Then we all know what happened, the bottom dropped out. In this case sales declined by over 35%, and like many other companies we had to make some tough calls. But here’s the thing, we had actually limited our debt and flexed our systems so we had months to decide the course of action. While we had tough decisions to make we could actually think them through analyze them. What an enjoyable situation considering. As we recovered, the robustness number became a guide for us to consider the impact of increasing our fixed costs.
We cannot change the economy, we can change our business! Build some robustness into your business and create margin and reserves. It is the best way to manage for the future.
SPC Consulting is focused on strategy, process and culture. Give us a call or email us at firstname.lastname@example.org today and let us help your business become more secure in the future.