Revenue or income is a vital number in business.  Without revenue, you don’t have a business, you just have a lot of expenses or costs.

Many business owners focus on the income, believing that the more revenue they have the more money they make, and whilst this is true, it’s not the full picture.  You see you need to look at the expenses and not just your business expenses.

The minimum monthly revenue you need in your business is enough revenue to cover all your costs and that includes the personal/living costs of you and your family.  This figure is called break-even because if you make this much revenue you won’t have made any profit, but equally you won’t have made a loss; you will have simply covered your costs.

Break-Even & How To Calculate It

Break-even is defined as the amount of revenue you need to make each month to cover your costs, no more and no less.

To calculate the break-even revenue you need in your business there are three steps.

Step 1

The first place to start in calculating your minimum monthly revenue required in your business has nothing to do with your business at all.   You need to look at your personal/living costs.  How much money do you need to draw from the business to pay the mortgage or rent, food and living costs, your children’s education and other costs, clothing, entertainment, holidays and so on?

Spend some time reviewing what you’ve spent on the personal and living bills for the past 12 months to get a full picture of what these costs add up to. You do need to look at 12 months to make sure you capture annual costs like insurances and personal motor vehicle registrations.

When you’ve got the total for the year, divide it by 10.  Now I expect that you would have thought to divide by 12 to get a monthly figure.  I recommend dividing by 10 because in just about every business I’ve worked with, there are usually a couple of months through the year that are really tough times in business.  It can be the December/January holidays and for

Spend some time reviewing what you’ve spent on the personal and living bills for the past 12 months to get a full picture of what these costs add up to. You do need to look at 12 months to make sure you capture annual costs like insurances and personal motor vehicle registrations.When you’ve got the total for the year, divide it by 10.  Now I expect that you would have thought to divide by 12 to get a monthly figure.  I recommend dividing by 10 because in just about every business I’ve worked with, there are usually a couple of months through the year that are really tough times in business.  It can be the December/January holidays and for

When you’ve got the total for the year, divide it by 10.  Now I expect that you would have thought to divide by 12 to get a monthly figure.  I recommend dividing by 10 because in just about every business I’ve worked with, there are usually a couple of months through the year that are really tough times in business.  It can be the December/January holidays and for some there are also slow times around June/July with the end of the financial year impacting spending patterns.

Now take this figure as being an after tax amount and work out what the gross amount would be each month to provide this figure as after tax is paid.

Step 2

The second step is to do the same for the business.  Have a good hard look at all your costs for the past twelve months.  Whilst doing this, make sure that all the expenses are required ongoing and if you’re not using a service, terminate it and cut out that cost.

Within this calculation there are two components.  The first is the costs that are fixed and will have to be paid for no matter what revenue you have.  Costs like rent, business insurance, equipment leases, professional memberships and so on.  And take this total and again divide by 10.

Then there are the second group that are costs that are variable and dependent on the quantum of revenue.  These include any costs associated with selling the goods or services.  These costs need to be factored down to a cost per $1 of revenue.

Step 3

The third step is to take the grossed up personal/living costs and add the fixed costs of the business and you have the total fixed costs.

Then using the variable amount per sale, work backwards to identify how much revenue you need to cover the total fixed costs.  This is your break-even revenue or minimum monthly revenue.

Summary

Once you know what your minimum monthly revenue is you can track how you’re going day by day, week by week during the month to make sure that you have at least covered your costs and broken even.

The ultimate goal though is to set a higher goal that provides you with a profit and use that as your monthly revenue target, always keeping in mind what your minimum number is.