How much do you need to sell to ensure your business is keeping your the doors open?
By ‘doors open’ we mean break even, the amount of money needed to cover all your expenses – that is, salaries and wages, superannuation, WorkCover, payroll tax, rent & occupancy costs, the phone and then all the consumables, components and freight costs you incur to deliver your product and services to your customer and keep the doors open.
How do you calculate your break even costs?
Let’s look at an example of the yearly profit & loss statement for Awesome Motors – [you should be able to print off your own Profit & Loss Statement from your MYOB, Quick Books or Xero Accounting Software].
Profit & Loss
Awesome Motors [Example]
|Sales – Engine Repairs||$450,000|
|Sales – Warranty Repairs||$12,500|
|Sales – Roadworthy||$25,000|
|Less Cost of Sales|
|Total Cost of Sales||$185,000|
|Less Operating Expenses|
|Total Operating Expenses||$248,473|
|Profit After Tax||$36,869|
- Take the operating expenses (all fixed costs including wages & salaries): $248,473
- Divide by the gross margin: 62%
- This equals: $400,762
The break even for Awesome Motors is $400,762 a year to keep the doors open or to be break even.
NOW divide $400,762 by the total number of days a year you work. If you’re only working business days, it’s about 250 days a year.
What’s my daily rate? $400,762 / 250 days = $1,603 each day needs to be invoiced.
Let’s take it a step further! My view is that the business needs to generate enough income for my family to live the life we want to live. Thus, I need to be paid for my time, but I also need to generate a return on the money I have invested in my business.
EXAMPLE: Say we have invested over the life of owning the business, $200,000. I want to generate a 20% return after tax on my investment which is $40,000 PLUS the salary and the super I get for me working in the business. We can reverse engineer the calculation above to work out what we need to invoice each day to hit that target profit.
|Equity in Business||$200,000|
|Return on Investment||20%|
|Target Profit After Tax||$40,000|
|Tax Payable (estimate)||$17,143|
|Profit Before Tax||$57,143|
|Divide profit target by 0.7|
|Total Operating Expenses||$248,743|
|Gross Profit Required||$305,615|
- Divide $491,599 by 250 work days.
- To achieve the Target Profit – we need to be invoicing $1,966 per work day.
Now you know your daily profit and the minimum you need to keep the doors open, work out what you need to do to achieve it.
Graham Van Damme
Owner, All Head Services (Aust) Pty Ltd
Accelerator Trainer, Entrepreneur’s Organisation