Why you need to do more than Break Even in business

by | Jan 20, 2018 | Archives

Let’s talk about money. How much do you charge? How did you work that out? Are you charging enough?

Whilst we go into because because of a passion, talent or desire to solve a problem etc – we must must must be on top of the $$. Otherwise, there simply is no point. You may as well be standing out the front of your house (if you could afford one) burning notes in a bonfire. Sorry to sound so doom and gloom, but I see so many amazing, passionate entrepreneurs who love what they do and put the blinkers on when it comes to the finances. It worries me. Off my soapbox now.

Back to my point. Simply picking a figure out of your arse to charge is fine when you first start your business, but as you grow, a break even analysis is a really handy tool for working out if you are charging enough.

Break Even sounds scary, right? Wrong. It’s simply a number you need to understand.
So what does Breaking Even mean? I could get interesting answers, given Breaking Bad is finishing up this week!!!

It looks a little more complicated than it is. Basically, it’s your fixed costs, divided by your price, minus your variable costs.

BREAKEVEN POINT = FIXED COSTS / (UNIT SELLING PRICE – VARIABLE COSTS)

Example:

You sell Coaching. Your fixed costs for 12 months are $52,000. Your coaching is $250 an hour, and you aim to sell 500 hours this year. Your variable costs for 12 months are $12,000 ($24 per unit).

Fixed Costs 52,000 = 230 coaching hours
Unit selling price – Variable costs 250 – 24

So you KNOW you need to sell 230 coaching hours in the 12 months to break even.

Why do you need to know this? It’s simple, if you don’t, you won’t know if what your charging is doing it for you. You may get confused by looking at the Cash Flow or Turnover – deadly (oops, I mean costly) mistake people.

Let’s look at an example:
If your turnover is $1 million, and you sell 10,000 units of Product A – you might think ‘WOW, $100 a pop, I’m doing good’. Oops, you didn’t look at your increased costs because of the extra fancy printing your doing for the folders. So your Break Even point is actually $90. Wowza. That’s not much of a profit then, is it people? BUT – if you keep an eye on the numbers (or have someone else give you them, but you understand them) then you could up the price as soon as you know it’s needed (or shop around for some reduced costs).

Very simple examples above – but I’m sure you get the idea.

I’m sure I’ve put some of you to sleep by writing about numbers, but understand this folks. If you do not understand your numbers, you will not grow (or even survive in some cases).

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