What do you think is the number one mistake practice owners make? Not charging enough, working too little, too few employees, too many employees?? In truth, all of these can be a problem for business owners but the NUMBER ONE MISTAKE practice owners make is not knowing the breakeven point. The breakeven point occurs when your business is neither making nor losing money. In other words – Revenue = total expenses.
I was talking with a new business owner who had fulfilled her dream and opened a restaurant. The business had grown faster than expected and she was struggling to keep up. She had hired several new employees to maintain a good service culture and the increased expenses had forced her to take out a loan to cover expenses. She wasn’t able to pay herself but she was quite certain that when business increased, she would be able to pay back the loan and start taking a nice salary. However, she really had no idea how much revenue she needed to operate the business and to generate enough excess cash to pay back her debts and to be able to pay herself a salary.
Unfortunately, this is not an uncommon scenario in new and established businesses. We are so busy working and trying to attract new customers that we lose track of how much revenue we need to generate each week or month or even day to keep the doors open. We hire a new employee and don’t take time to calculate the additional revenue we have to generate to pay that salary. Suddenly, we find ourselves working more and more hours and at the end of the month, we don’t have the extra cash we expect.
I remember my turning point, when I said, “What the heck? I worked my butt off and I make less than my receptionist. Things have to change!” That’s when I decided that my focus had to be on tracking my numbers and knowing what it took to run a profitable business. It’s not much fun to work your butt off (I so wish that really happened) and then not to have enough money to pay yourself a salary that reflects the amount of work you do.
In case you are wondering where to start to determine your breakeven there are a number of ways you can calculate it. One simple formula uses your fixed costs and gross profit margin to determine your breakeven point. Fixed costs exist regardless of how much revenue you generate. They include expenses like rent, employee wages, utilities, insurance, telephone, internet – bills you have to pay every month. If you sell a product, the gross profit margin is the percentage of sales left after subtracting the cost of goods sold.
There are many great resources and sample worksheets on the internet to help you determine your breakeven point and certainly, your accountant can help you figure it out.
Working harder and not being able to pay yourself or paying more and more employees and not being able to pay yourself is not very satisfying. Take some time to find out your breakeven point in the next month. Don’t put it off. You will feel so great when you know what it takes to run a profitable business.