Companies need a frame of reference to plan and guide their businesses, just like any other operation. Whether you need to drive a car, a boat or a business from A to B, you need:
- a means of choosing and identifying the destination
- a means of planning and mapping the best route
- a means of “homing” to plan during the course of the journey
- a means of altering the plan in the light of obstacles or difficulties that may be encountered unexpectedly along the way.
Strong businesses are characterised by a low breakeven point, weak and vulnerable businesses by a high breakeven point. The strength or vulnerability of a business can be calculated on a scale of breakeven points:
- Above 90% = suicidal
- From 80% to 90% = vulnerable
- From 70% to 80% = strong
- Less than 70% = exceptionally strong.
Really well run companies such as Bamford (JCB) operate as low as 50%. Fundamentally weak operations sometimes have a breakeven point well above 100%. Even at full capacity they lose money. The first rule, therefore, is to ensure that your business is structured to be able to make money at well below full capacity.
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