One of your first steps in creating the financials for your business development strategy is to determine what your break even number is. I know. It’s not the easiest task, but it’s one that will help you sustain and grow your business for the long term.
The Break Even point is the dollar amount you need to sustain your business each month. In other words, in order to keep the lights on and the internet humming, what do you need to earn to survive? Not make a profit. Not grow. Just cover your expenses.
Or another way to consider it – What are the minimum number of clients that you need to maintain (depending on your business model) throughout the year in order to keep the basic bills paid?
Many claim to know this number, but it might surprise you when you work from your actual finances because it’s usually higher than you think.
So here are the steps I encourage you to take:
- Tally your monthly expenses – Go through your bills, online statements, credit card and bank statements and come up with the figure of what you spent last month. If you are not well organized, this might take some time. So come up with a good reward now for yourself when you finish this task. Pull out receipts. Pull out statements. Gather all expenses that you can find related to your business and add them up. Some may prefer a simple spreadsheet to add everything up. Others are looking for online models to help out. I recommend looking into sites like Indireo.com and Quickbooks.com. (Now the challenge with these sites is that you’ll probably have to wait until next month before you determine what your monthly expenses are. But better you start today than wait another month!)
- Determine your annual expenses. If you’ve been in a business over a year and filed taxes, it’s as easy as looking at your last tax filings. Or you could refer to your accounting systems like Peachtree or Quickbooks to see what your number is. If you haven’t been in business over a year and are not the greatest about keeping records, you are going to have to estimate. Think about months that you had higher expenses (i.e subscriptions, memberships you bought, ordering supplies). Also consider months that business was slow but you had to purchase services for your own business – the new credit card reader or the event planning software.
- Total the annual expenses and average the number. While there are months that you need to earn more money, there are certain to be other months that you’ll need to earn less. Averaging them will help you arrive at a ballpark number.
For example, if you spent $100 during 5 months, $400 during 3 months and $700 during 4 months, you would have spent $4500 for the year and would have an average of $375 in expenses each month.
This means that every month – whether you are spending $100 or $700, you need to keep the $375 number in your mind.
Use the average as your minimum monthly sales goal
What many business owners focus on is maintaining last month’s expense number in mind. This is great during the months that you needed $700 and you were able to garner $700 in services. But somehow, it never works perfectly like that month after month.
I recommend that you keep the $375 number in mind as your first sales milestone every month. It will help you stay motivated during the months you spend only $100. You won’t get lazy and only seek out $100 in sales for the upcoming month. It will ensure during the months that you need to earn $700 that you’ll have some money available to spend – without having to borrow from friends, family or credit.
I hope you were able to take away some valuable ideas from this post. Keep in mind though, the break even number is only one number in outlining a business development strategy. While it doesn’t allow you to generate a profit (yet!), it does give you a target number for you to focus your sales.