Break Even Analysis

Calculating your businesses' break even point is crucial to becoming a successful entrepreneur.

Why have I never calculated a break even analysis for my copywriting company? Partially, it's procrastination - a skill which I (and many other entrepreneurs) hold in abundance. Another important factor has been the "what's in it for me?" factor: why do I really need to spend more time on the backside of my business when I need to increase my marketing efforts and, in turn, the bottom line?

Well, as I am learning, in order to increase my bottom line, I need to know what the bottom line actually IS. Calculating my monthly fixed costs is the first step of determining my break even point, so here goes:

• Yearly web hosting cost: $100 USD, which calculates to approx $10/month CDN.
• Phone: $50/month
• Business license: $100 CDN yearly, for $8.33/month.
• Incidentals (computer parts, paper, photocopying): $50/month.
• Living Expenses/Salary: $2500/month.

Therefore, my total monthly fixed costs are $2638.33, rounded up to $3000. Yes, my monthly fixed costs are minimal in comparison to most business owners'.

As well, I need to determine how many hours a month I can actually write. Like all small business owners, there are daily tasks for entrepreneurs required that cannot be billed for. Therefore, I've determined that 20 hours/week, or 80 hours/month is the maximum amount of writing hours I can allocate in a month.

Now comes the break even point calculation:

Fixed monthly costs / (Unit Price - Variable Cost) = Monthly Break Even Point.

We've already determined my fixed monthly costs are approximately $3000/month. My variable costs per unit are 7.5% of the unit price (hourly fee in my case), so I've had to put in an additional calculation to determine my break even point. [As an aside, this type of break even forecasting is called Total Absorption Costing as it absorbs the fixed costs into the calculation.]

So, if I were to sell my copywriting services at a $35/hour rate (very low for the industry), I would calculate my break even point like this:

• Fixed Monthly Costs: $3000
• Hourly Rate: $35
• Cost to Produce One Hour of Work: (35/7.5%) = $32.38
• Hour of Work Divided by Monthly Costs: 92.65 hours needed a month to break even.

Since this is way above my maximum amount of writing hours a month, I obviously have to increase my fees. Let's try $50/hour (getting closer to the industry average):

• Cost to Produce One Hour of Work: (50/7.5%) = $46.25
• Hour of Work Divided by Monthly Costs: 64.86 hours needed a month to break even.

Now that looks a bit more palatable to me, working 65 hours a month instead of 90+.

And now I can play with my break even point to see how I'd manage a six figure writing income:

• Monthly income required to make $100,000: $8333.33

Therefore, monthly fixed income is rounded off to $8500.00, although I think if I want to make this kind of money I'll need a higher budget (marketing and PR), so let's go with $9000.

Hm. What would I have to charge to make this kind of copywriting cash? Let's try for $100/hour:

• Fixed Costs: $9000
• Hourly Rate: $100
• Cost to Produce One Hour of Work: (100/7.5%) = $92.50
• Hour of Work Divided by Monthly Costs: 97.26 hours a month to break even.

That's better than I thought it would be, but not good enough. I can't write that much AND garner new clients. Let's try $125/hour.

• Cost to Produce One Hour of Work: (125/7.5%) = $115.63
• Hour of Work Divided by Monthly Costs: 77.83

Bingo!