At the end of every year business owners all over America look at their profit and loss and see how their businesses performed. At first they only look at three numbers – gross revenue, gross profit and net profit. After that they dig into the meat and potatoes of how those numbers were calculated.
The gross revenue is obviously the income you generated in your business. Then you deduct what I call direct costs from it to come up with your gross profit. And from there you deduct your indirect costs to determine your net profit.
Now be aware that these costs have other names as well. Direct Costs are also called Cost of Goods Sold and Indirect Costs are also called Overhead Costs or General and Administrative Costs depending on your industry. But for simplicity I am going to use the terms direct and indirect.
Direct Costs are costs that are directly related to a specific task or project. Regardless of the business or industry you are in, there are some aspects of your business that you can perform these job costing tasks for. Job costing is not just for construction contractors. It’s just another way of saying project costing. Project costing is just tracking the revenue and expenses on a specific task or project.
Are you a contractor?
In this industry, your direct costs are the materials, labor and subcontractor costs that you spend on each and every job. In your industry these costs are call Costs of Goods Sold.
Are you a coach or consultant?
In this industry, your direct costs are related to your major events or initiative. If you are hosting a major annual event, that event is a project and your direct costs would be space rental, food and beverage, and marketing directly related to that event.
Are you in the MLM space?
In this industry, your direct costs depends on the what you sell. If you sell a product these are your catalogs, display items and inventory items you sell. If you sell a service, these are the promotional and education materials you purchase to share with potential clients.
Now indirect costs are the costs that are needed to keep your doors open. As I said these are also called operating costs or general and administrative costs. They are not directly related to any specific job, project, customer or client. They are the costs that it takes to be a full up and running functioning business. These are things like your office rent, office supplies, telephone, utilities, licensing, certifications and training expenses and general marketing and advertising expenses. The key here is that these costs cannot be traced back to any specific job, project, customer or client but they are costs that are incurred to keep your doors open.
Now that you have the foundation, let’s calculate your breakeven point. A breakeven point is the point in your business at which your income meets your expenses. It is the point at which profitability occurs. It is essentially ground zero. And it’s a simple formula. You simply just take you direct costs and your indirect costs and add them together. Whatever number you come up with is the amount of income you minimally need to generate to keep your business afloat. You don’t have a profit but you also don’t have a loss.
Now you can take it a step further to determine how much money that is per month and how many clients you need to hit that mark. But that’s another post.