How to calculate the most crucial number for your business

Often the focus in business is all around revenue, but there is one crucial number that service-based businesses need to focus on even more.

Break-even.

Break-even is the minimum amount of income you need to cover all your costs.  It’s the bare minimum number you need to keep your head above water each month.

So how do you figure it out?

Oddly enough, we’ll start with your non-business expenses. Your personal expenses.  While break even is all about the business, we need to understand what you need to be drawing out of the business to look after yourself.  Think of this as your personal break even!

1. Start by writing a list of your personal expenses

These are your portion of the household expenses to keep the house running smoothly. We’re talking mortgage, rent, electricity, telephone, clothing, entertainment, schooling, food. 

If you're already drawing a certain amount out of your business - as a salary or drawings – this is a good chance to check that what you are drawing is still sufficient for the household needs. 

Make a note of this personal expense number and we’ll integrate that into the business numbers soon.

2. Dive into the businesses P&L

Extract the Profit and Loss (or P&L) report out of your accounting system for a complete 12-month period.  You need to ensure that you have 12 complete months to cover all those expenses that only come around once a year.

Your profit and loss statement will have a list of expenses in alphabetical order, from accounting and all the way through down to wages and workers comp.

Look at each of those lines and identify the following:

• Is the expense ongoing?
• Are you planning to spend more over the next 12 months?
• Are you planning to cut costs over the next 12 months?
• Are there any costs you may be able to eliminate entirely?
• Are there any one-off expenses coming up in the next 12 months that you need to allow for - eg. a conference or a website overhaul?

Once you have completed this exercise for each and every line item under Expenses in your P&L, you will have an idea of your expenses for the following 12 months. 

Ensure that you have allowed for the money that you need to pull out of the business that we calculated first up.  This needs to be either taken into account in your wages line of your P&L or allowed for as drawings before you get your final expense number.

3. Working weeks per year

The next thing we’re going to think about is how many weeks you have staff who are going to be working productively in the business.

In Australia we work it out a bit like this:

• 52 weeks in a year
• Less 4 weeks annual leave entitlement
• Less 2 weeks for Public Holidays
• Less 2 weeks for Personal Leave entitlement

That's 8 weeks out of 52 that your team won't be working.  Even if they don’t take 2 weeks personal leave you should always work this out based on what they are entitled to not what they take.  Now, when you're looking at your break-even figure, the amount you need to be working on, is "How much do I need to make to cover my twelve months costs in 44 weeks?"

4. Now for the calculations

Business Expense Number  ÷  Number of Weeks = And THIS is your break even

This is the amount you need to be making in charged, productive time per week. Keeping track on that will give you so much more confidence about how you're going in your business.

5. Smashing the break-even

As I mentioned at the beginning, break-even is the minimum you need to make to keep your head above water. And, let’s face it, no-one wants to be in business to be paddling around without some play money in their pocket.

So now that you know your break-even, ideally you should be aiming above that to create profit each month in your business. 

6. Revisit the number

If you find yourself spending more than you originally planned, go back and re-calculate your break-even so you always have an accurate picture of how the business is tracking.

Action Points

• Calculate your personal requirements
• Pull out the profit and loss from your accounting system, revisit each and every line item for variations
• Think about how many weeks you will have a productive team working
• Take your total costs, divide it by those number of weeks, and that's your break-even.

The last step is to start to track your Break-Even. Keep an eye on it. See whether it takes some of the stress off your shoulders. See whether you start to feel a bit more confident about how the business is going.