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Most small business owners with employees understand the need to have a clear break even number. But what about businesses that are run out of a home office? How important is a break even and what are the components in determining it? Here is the best way to figure the break even and why you need to understand it.
First off, a “break even” refers to the amount of money a business must make before it is profitable. This can be figured out per job, per month, per week. Obsessing about it by the week will mostly bring you gray hair. Get a monthly break even and use it to keep a pulse on your business..
Why know your business' break even? First, it helps you establish if your business is truly profitable, or if you are keeping it afloat by working practically for free. This becomes essential if you ever seek financing for special projects, expansion or equipment. Loan officers require you to be getting some kind of competitive salary or dividends out of the business, and so does the IRS. Knowing your break even and its relationship to your salary gives credibility to your business. Your salary must be figured into the costs of the job, and the total costs of the month.
Take a massage therapist who runs his business out of his home. He gets the local going rate of $30 per half hour session. With expenses of $300 a month, the therapist would not begin making money until after the tenth job. The break even without salary was easily evaluated. Now he wants to know what his break even is if he figures in his salary. To do so, he wants to know what kind of a salary he would get if he worked at the local health club. There he would be hired at $25/per half hour.. Next he figures his salary should be based on that $25/hour at his home business. Again, it is straightforward. He figures he can work six hours a day, four days a week before falling over from fatigue. This is $1200 a week, times 52, and divided by 12. He will earn $ 5500 a month for a yearly of $62,400. He likes the look of that salary!! That means he needs to work on 184 people a month, just to break even. The first 15 days of a month is spent just reaching the break even.
Now comes the reality of his business. The massage therapist knows that he lives in a small city and probably doesn’t see that many people walking through his door in a month. He also needs to factor in a vacation, or slowdowns. He adjusts his hours, knowing that means less income. Now he has a realistic salary, then he can readjust his break even to match those numbers.
This is a great example of just why a small business needs to know its break even. Now this massage therapist can make smart business decisions. Should he charge five dollars more per session to improve profitability? He can establish a budget to save for classes, new equipments or updating his office in the future. Maybe he should consider teaching classes, or sell a product line to bring in more income. But without that break even number, he will just be guessing as to how to run his business. In the next article, we'll look beyond salraies, to see how the break even number can be used even more.