[Management Plan] (7) Why is there no profit despite having sales? ~Management structure viewed through break-even points and fixed cost reduction~
Companies die not because of sales, but because of fixed cost design
Many companies think that things got difficult because sales dropped, but
the reality is a bit different.
What really chokes a business is
not sales, but
errors in fixed cost design.
*This series consists of 7 parts in total
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Optimizing the balance between fixed costs and investment
Sales fluctuate.
They depend on the market, competition, and timing.
However, fixed costs
do not go down easily once they have been built up.
In other words,
the durability of a business is determined by its fixed costs.
The problem is that many companies treat SG&A expenses
as "costs all lumped together."
You cannot make decisions this way.
What is important is
to categorize SG&A expenses by structure.
--
First, you should look at the break-even sales volume
The first perspective you should incorporate into SG&A expense design is
the break-even sales volume
.
Once sales and costs are determined,
the next thing to look at is
whether those sales exceed the break-even point
is.
This is because,
no matter how much sales grow,
if you do not exceed the break-even point, no profit will remain.
Conversely,
Sales
Cost of goods sold
Fixed costs
If you organize the relationship between these three,
"where you start making a profit"
becomes clear.
The break-even sales point is,
roughly speaking,
Fixed costs ÷ Marginal profit ratio
is how you look at it.
The marginal profit ratio here is
the ratio that remains after subtracting variable costs from sales.
In other words, the higher a company's fixed costs,
the larger the sales required to become profitable.
What is important for management decisions is not
"whether you have current sales."
Whether your current sales
consistently exceed the break-even sales point
is.
If you accumulate SG&A expenses without looking at this,
the problem will not be visible during phases where sales are temporarily high.
However, the moment market conditions worsen slightly,
you will fall into the red all at once.
--
Designing SG&A expenses
SG&A expenses are broken down into the following three categories.
1. Fixed costs (costs that must be maintained)
Example:
Personnel costs for core talent
Infrastructure systems
Minimum office and infrastructure
These are not targets for reduction.
However,
they are not things to be maintained unconditionally either.
The important thing is
to keep only what truly needs to be fixed as fixed costs
.
The higher the fixed costs, the more rigid the management becomes, so
the level must be designed to be as light as possible.
2. Semi-fixed costs (adjustable costs)
Example:
Hiring pace
Outsourcing and subcontracting
Some indirect personnel
These are costs that can be expanded or contracted depending on the situation.
By using this as a buffer,
management flexibility is created.
3. Investment (costs used with the premise of a return)
Example:
Advertising expenses
New business
Product development
These are not costs, but
expenditures to generate returns
.
The evaluation metric is not reduction, but
ROI.
--
Thoroughly scrutinize fixed and variable costs
What needs to be done in SG&A expense design is clear.
Thoroughly scrutinize fixed and variable costs
.
This is because
the biggest factor that makes the profit structure rigid is fixed costs.
When fixed costs increase,
what happens?
You fall into the red even if sales drop slightly
The break-even sales point rises
Investment capacity disappears
Freedom of decision-making is lost
In other words,
you become unable to go on the offensive.
Therefore, the basic policy is simple.
Think about reducing fixed costs as much as possible
The reduction referred to here is
not just simple cost-cutting.
Not fixing costs in the first place
Making things variable whenever possible
Keeping only what is truly necessary as fixed costs
This is the design philosophy.
For example,
Are there tasks that can be handled without full-time employees?
Are the office and facilities excessive?
Are the systems and management structures too fixed?
Are there areas that can be made variable through outsourcing or contracting?
Through these questions,
it is necessary to lower the total amount of fixed costs.
--
Fixed costs constrain management
What is even more important is that
fixed costs are
a history of decision-making.
Hiring
Expanding locations
Organizational bloat
These are all
the accumulation of past decision-making.
And once they are fixed,
the cost to reverse them later is extremely high.
That is why
decisions regarding fixed costs should be even more cautious than investments.
--
The structure of a strong company
Strong companies have
a clear design for SG&A expenses.
Fixed costs → kept to a minimum
Semi-fixed costs → maintained as a buffer
Investments → executed aggressively depending on the situation
Through this structure, they achieve both:
the ability to withstand downturns
keeping the break-even point low
the ability to invest aggressively during upturns
as well as these benefits.
--
Common failures
This is the most common one:
Increasing fixed costs too much in line with growth.
Hiring because sales increased
Expanding the organization because things are busy
Expanding locations because there is extra cash
If you continue to make these decisions,
the moment sales drop,
you will structurally fall into a deficit.
This is because
the break-even sales point has risen too high.
--
Design Principles
The essence of SG&A expense design is simple.
Deciding "what to fix and what to make variable."
There are three criteria for judgment.
Should that really be fixed?
Is there any room to make it variable?
Even if you add that fixed cost, can you continue to exceed the break-even sales point?
If you accumulate fixed costs without passing this question,
management will certainly become rigid.
--
Conclusion
A company does not die because sales fall.
It dies when fixed costs are heavy and
it can no longer exceed the break-even point.
Therefore, the most important thing in SG&A expense design is to scrutinize fixed and variable costs, and
create a structure that keeps the break-even sales point low.
.
Structure
Situation: Falling sales is recognized as the problem
Problem: The break-even point is high due to a design error in fixed costs
Decision: Break down SG&A expenses by structure and minimize fixed costs as much as possible
Result: Achieving both resilience and room for growth
Structural explanation: Management is constrained not by sales, but by fixed costs and the break-even point