Saturday, March 30, 2013
Are You Breaking Even?
So that you can move forward, you should do a break-even analysis which will allow you to consider the changes possible in your business—changes which might increase your profits or stop the drain on resources. To figure a break-even point, you must separate fixed costs—rent or mortgage, car payments, etc.—from variables.
Your break-even point is defined as that point where revenue equals cost. You need to separate expenses into fixed and variable costs. Fixed costs are those costs that remain constant over a short period of time. Variable costs are those costs that change proportionately to any changes in the volume of your business.
Dividing variable costs by sales revenue gives the portion of each sales dollar that is required to cover variable costs. This is known as the variable cost percentage. Subtracting this amount from a dollar will give you how much is left to cover fixed costs and profit, otherwise known as the profit-volume ratio. Since profit is zero at break-even, the division of the total fixed cost by the profit-volume ratio gives the dollar amount of sales required to cover all fixed costs.
Once you know this amount, you’ll need to do some income projections. Since you won’t be getting a weekly paycheck, you’ll need to know just how much work you’ll have to do per week, month, or quarter in order to reach your break-even point. In the beginning, you’ll probably project work for a month, but as you move forward, you may want to expand that to three months or a quarter.
List all work that you’ve lined up and add any other jobs that may appear once the quarter has started. Add up all the income you expect to receive, then subject the amount you figured above to cover fixed costs. This will leave the amount you need to cover variable costs. If you come up short, figure how much and then find work to fill the void. If you don’t, you’ll have to carry over the shortfall to the next quarter.
When you get paid for each job, insert the amount to the right of the projected amount. At the end of the quarter, add up all the paid amounts to figure your actual income.