So, you started a business, very exciting. Congratulations! All your friends and family have given you big high-fives and they’re looking forward to your success. So now what? There are a lot of critical questions to answer right at the start, but none more prominent than “What will I charge?”.
Many of our conversations with business owners and leaders tend to come back to this topic. We thought right out of the gate, we would explore it honestly and share a little guidance (and a few more questions) to consider.
Whether you’re just starting out, or your business is suddenly taking off, or you’re about to expand, you need to know what to charge. What does the market dictate? How much is your time and product worth? How much money can you expect to actually make after you pay the bills? One of the most important exercises at that beginning stage (and other stages of growth or change along the way) is to conduct a break-even analysis. How else will you know how to price your product or service? After all – we all want to enter into the holy of holy’s, otherwise known as the Profit Land.
Many business owners make the mistake of taking on projects without truly understanding the numbers. They jump in head first and money comes into the account and money goes out, and when the work is completed they haven’t made a penny!
Here is where you have to revisit those good ‘ole business school classes about break-even costs. Your break-even point is simply where revenues equal costs. Maybe you didn’t go to business school…maybe you’re an artist, or a technical genius, or you majored in creative writing and then ended up killing it in sales. You’re in good company. Not every business owner has a business degree, and if they do, they might have slept through their accounting course. Well, here’s a little clip to get you in the mood before we dive into it.
Since profitability is so important for long-term success, this is a place to start:
Break-even point in (units) = Fixed Costs/Revenues (per unit) – Variable cost (per unit)
This calculation is based on units (widgets) sold. Fixed costs such as rent, insurance & salaries won’t change regardless of how much you sell, or don’t sell. Variable costs like materials, training costs or travel will have to be projected based on what you expect your projects or prospects to look like.
Break-even point in (sales dollars) = Fixed Costs/Contribution Margin
This version is based on sales (dollar-bills) where contribution margin is simply the price of the product (or service) minus the variable costs.
When you mind your break-even, it will be apparent that not all opportunities that come your way make good business sense. You won’t want to accept every offer, or take every contract. What are your non-negotiables? What kinds of clients or mixes of projects do you need to go after to make sure you break even? Remember, the goal is to be profitable. If you’re not going to make money in a deal, let it pass. You can break even sitting on the couch at home. You’ll be a lot more comfortable and maybe even more well-rested.