Tweaking break-even points for fun and profit

The difference between a good business and a great business is normally just a tweak or two.

About 20 years ago I remember sitting in a lecture thinking that the concept of Break Even Analysis was just a little too basic and boring. Accountants describe the break-even point is when:

When n x sales = n x variable costs plus fixed costs.

Or even more plainly, when:

Revenue = variable costs + fixed costs.

Now I thought this was a little too basic and boring because it gave me a fairly obvious goal, but as a business owner it didn’t help me figure out how to get there, and there was no point doing things to simply “break-even”.

Fast-forward 20 years though, and I have picked up the tweak along the way that makes all the difference. The key is realising that the break-even point is very psychological. In more than one organisation I have worked in, I found staff tended to start cruising as soon as they get to their break-even point, as they are then revenue neutral.

But from the owner’s point of view, their break-even point needs to include a return for undertaking the activity in the first place and taking on risk. Therefore, I now see and use the equation like this:

Break-even is when:

Revenue = Variable Costs + Fixed Costs + My Required Profit.

If we get revenue that exceeds what I need, we then enter the realm of super profits, ie. my upside for taking a risk.

It’s not just me that uses the equation that way, if you look around you will see “My Required Profit” hidden in plain view. In the car industry it’s called “dealer delivery charges”, in the telecommunications industry it’s called the “service fee”, and in personal services it sometimes get called the “account management fee”.

Because when profit masquerades as a cost, nobody gets upset. Do you think the cap on your mobile phone spending would be as palatable if it were called more accurately “your minimum monthly spending”?

When I trained as an accountant the problem was that the tools were never described from the point of view of, “Here’s how you tweak it to make a sh*t load of money”. Perhaps if they were, I would have paid more attention.

Brendan Lewis is a serial technology entrepreneur having founded: Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club and Flinders Pacific. He has set up businesses for others in Romania, Indonesia, Hong Kong and Vietnam and is the sole Australian representative of the City of London for Foreign Direct Investment. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.