Do you know how much it costs to run your business? Your ‘break-even point’ of how much in sales you need to make to cover what it costs you to stay open for business. So if you were to stay in bed like a supermodel and not do any work or make any sales, it’s what your business would cost you.
So these costs are incurred in your business regardless of whether you’re actually “open for business” or getting sales. These costs will continue to be incurred even if you choose to have a holiday. Your industry and/or your business model, can determine what costs are included. Let’s look at some examples of typical costs:
- Rent/lease costs
- Rental of equipment
- Employee wages
- Insurance
- Lawyer fees
- Accounting fees
- Owner salary
- Internet
- Software subscriptions
- Long term service agreements
- Utilities
- Annual renewals
- Mobile phone contracts.
How can you calculate it?
Simply take the annual figure for expenses like those above that will be incurred regardless of the number of sales you make and add them all together. Divide by 12 to arrive at a monthly figure, by 52 for a weekly figure and 365 for a daily figure.
For example:
Total Annual costs incurred in my business = $82,400
Annual when I stay in bed my business costs me: $42,150
Monthly when I stay in bed my business costs me: $3512
Weekly when I stay in bed my business costs me: $810
Daily when I stay in bed my business costs me: $115
In this example, the business needs to make sales of at least $115 per day to “break even”. Knowing your break-even point is critical because it helps you establish your sales targets and forecast your profitability. Often business owners forget to include their own salary in the cost of running their business, which is a mistake because if you ever had to hire someone to cover your role, you would need to pay them.
Now of course when you make a sale, there are other costs incurred associated with that sale, known as variable costs. These are the costs that are incurred when you do get out of bed and make a sale, such as packaging costs, subcontractor wages, product costs and the like.
In the example above, it’s more than likely that costs that you would get out of bed for are incurred and would increase that $115 per day to a higher amount. But to simplify calculate your “stay in bed costs” and know you need to make that each and every day and be aware that “get out of bed costs” occur for each sale you then make.
As an accountant and former surf shop owner Alycia understands the issues that small business face everyday. She believes you can work on your business effectively simply by understanding your business numbers. She creates innovative systems and processes that enable business owners to be highly focused and productive in their business. If you are interested in receiving insider tips on how to understand your numbers, join us here. As a bonus you’ll receive the report “You or Your Bookkeeper Could be Costing You Money.”
Your task: figure out what both your “stay in bed” costs are for each day and your “get out of bed” costs associated with making a sale. We can’t all be supermodels! http://www.bookzkeeper.com.au
