The Hardest Thing You will ever do in Your Business

Well now, that's a catchy title.. but that doesn't make it any easier for you. I guess I could have taken a poll here but then you might want me to write about something that I don't know anything about.

For some, the first thing that comes to mind is balancing the check book and that would be close to today's topic. However, we are going to talk about knowing your break even. Since this is done so seldom we need to talk about what "break even" is.

We will define this term as how much money the business needs to make to pay the bills... all the bills. Owners' salary, supply bills, building rent or note, lights, phone bill, advertising, direct labor, the whole thing. You need to know just how much staying in business costs you. Since I am such an advocate of using "Billable Hours" to manage your business, this is how it should be expressed.

Since most small businesses lack a starting point, here is a general way to start. First of all you get all your expenses for a 12 month period defined. Every expense account on your balance sheet needs to be used. Now before you start crying too loudly, these are the numbers you needed to file your last tax return. You will list them all and total them.

Next, you will need to determine how many billable hours that year in business represents. If those numbers are not available we can do some rough math by looking honestly at your technician efficiency. If it will make you feel any better, these are the numbers you will need to maintain your pricing guide lines.

Most Service companies I have worked with use a simple 50% efficiency. It is scary to note there is never more than a plus or minus 5% when starting out.

OK. Now it is time for the hard part. Divide the total annual expenses with the total billable hours. Most business do this about 4 times thinking there something wrong with the math. But when the same number comes up every time, we have to resolve it is correct.

The nice part is knowing this calculation makes managing your business much easier. In the example, we know that Thomas has expenses that cost 14 billable hours per day. Once we have exceeded this amount, they know that they are profitable for the day - if they work a five day week, that is hours per week, or 301 hours per month. Once you "crack your own nut" the business starts making profits - every time. So rather than looking at gross sales per day, trying to determine cost of material, tax or labor, you simply need to know "How many Billables"

Some caution, you want to use one full year to calculate this, since most service business are seasonal and can be more or less busy due to the seasons, and when you first start this be sure to compare you actual to these beginning figures.

But how easy is it to answer a technicians' request to go home early for his kids' ball game. If you have break even for the day accompany your technician to the game. If not, many times all you have to say is "we have more calls, or, we haven't hit break even yet today - and pause. Chances are if they are empowered employees, they will give you the solution on how to make up the time.