Need more income from your business? One of the first questions I ask my coaching clients is “What is your breakeven point?” Not what you want to earn, but what you have to earn in order to meet your monthly expenses. A surprising number of business owners cannot answer this question.
If you can, congratulations! If not, let’s look at three easy steps to find your breakeven point. To make it even easier, download my Cash Flow Calculator.
First, a few reminders of what knowing your breakeven point can do for you:
- Less anxiety: Many of my clients come to me with a underlying feeling of dread about money. Knowing your breakeven point relieves that dread and puts you in control. As one of my clients put it “I’m so sorry I resisted pulling these numbers together for so long! My breakeven point was lower than I thought, and now it gives me a realistic goal to work towards each month and great joy when I exceed it. It feels like a tremendous weight has been lifted off me”.
- Increase Your Income: This can be as easy as cutting unnecessary expenses or simply a starting point in seeing the difference between where you are and where you want to be.
- Allow you to pay yourself a salary: If you are not paying yourself a regular salary, you have a hobby, not a business, so stop feeling guilty about paying yourself. A salary should be included in your breakeven calculations.
- Make business planning easier: Want to add something new to your business? Add the costs to your breakeven calculations to easily compare how the added expense will affect your breakeven point.
- Spend your money comfortably: See a conference or marketing class you want to attend? If you have exceeded your breakeven point (or, even better, set aside money for professional education as part of your breakeven analysis), you’re in.
- Say ‘No’ When Appropriate: Sometimes the smart choice is saying no. This is not the same thing as saying ‘I can’t afford it’. Knowing your breakeven point allows you to choose wisely among all your options.
Step One: Collect Your Numbers.
Use one of the following (easiest listed first)
- If you have a bookkeeper, this is really easy! Just ask them to give you your breakeven point.
- If you are using accounting software, like Quicken or Quickbooks, run a profit and loss statement for the last 12 months.
- Don’t worry if neither of the above applies; you can get still get a good estimate of your expenses by looking at your bank and credit card statements from the last 12 months.
Step Two: Organize Your Numbers
Your goal is to list every expense as a monthly expense.
- Although you can do a quick and dirty estimate on the back of an envelope, a spreadsheet is really your best bet because once you have it set up, you can easily make changes to your numbers and see how those changes will affect your breakeven point.
- If using a simple spreadsheet intimidates you, Lynda.com offers a self-paced online Numbers Essentials (Mac users) course in just over 4 hours, or Excel Essentials (PC users) in just under 9 hours. Knowing how to use a simple spreadsheet is a fundimental skill for a business owner, even if you intend to hire a bookkeeper or CPA.
Step Three: Find Your Breakeven Point
- Add all your monthly expenses.
- Some expenses may fluctuate from month to month, or occur only once or twice a year. Find the yearly total and divide by 12 to get a monthly figure. For example, if you pay $104 once a year for your business license, $104/12= $8.67. $8.67 is your monthly expense.
- If you have a service business, this is your breakeven point – the amount you need to earn to cover your expenses.
Want to make this even easier? Use my Cash Flow Calculator and just input your numbers – the formulas are already added to calculate your breakeven point. It’s a simple version of what I use myself. Click the button below to order a copy you can use in your business right now.
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