Managerial Analysis - Breaking Even with a Side Hustle
For many small businesses and new entrepreneurs, a significant milestone to achieve is breaking even financially for a given period such as a month, quarter, or year. Breaking even means that the net income of the business is above $0. In other words, the money brought in is at least the same as the money spent. The key to knowing what the breakeven points for the business lies in the following three areas:
Fixed Costs – Are incurred in the same amount regardless of the operation of the business. For many smaller businesses, these costs will include rent on leased office space, website hosting costs, and salaried employees (if any)
Variable Costs – Increase with the level of business activity. In other words, the more business I have (units sold, hours worked on contracts, etc.) the more variable costs are incurred.
Selling Price – The above two areas were focused on the “how much is spent” category. The selling price of your good or service helps to determine how much money is brought in to the business.
The relationship these costs have with your business operation can be summarized in the below equation:
Based on these relationships, there are two key takeaways for those just starting their business venture:
The selling price of your good or service must always exceed the costs to produce and deliver that good or service. Otherwise every customer you service will lose you more money. The difference between the selling price of the good or service you are selling and the variable costs to produce it is called the contribution margin, which needs to be positive in order for the business to make money.
If the above statement is true, a business venture with no fixed costs will always break even. This occurs because in the event nothing is sold, there are no costs incurred to keep the business running (such as rent or website hosting costs).
Now that we know all this, let’s consider a quick example of how this analysis can help a young entrepreneur breakeven in his first month of business:
Bill is selling winter car emergency kits outside of his local hardware store during the month of November in order to help his community prepare for the upcoming winter season. He can purchase a monthly selling permit from his city for $200 and the hardware store owner has agreed to allow Bill to use some of his premises for the month for $300 (fixed costs). Bill buys each kit for $30 wholesale (variable cost) and expects to sell each kit for $50 (selling price).
Bill wants to know how many kits he needs to sell in order to cover the costs of the permit and the premises because he knows once he covers those costs, he breaks even and takes home the rest of the net income as cash. To figure this number out, we use the following equation:
When we plug the numbers from our case into the above equation, we get:
Why does it matter?
Bill wanted to know how many units he needed to sell because this was his side hustle for the month. He has a full-time job and a limited amount of time on the weekends to sell his kits, and with this information he can plan his month with the goal in mind to at least sell 25 units to break even on his money. If Bill saw these numbers and thought he would not be able to sell 25 kits during the month, he would not go forward with purchasing the permit or the space from the store owner. Inversely, if he believes that he can sell much more than 25 kits in the month, he would start adjusting his schedule and planning out his selling times so he can make a lot of money with his new side hustle.
Are you starting a side hustle or running your own business? See if you can identify these metrics in your own business so you can down your own breakeven analysis. Once a business has an idea of how much business they need to do in a period to turn a profit, they will either enact a plan to increase their volume to ensure they meet that level of sales or look for ways to cut out unnecessary fixed costs.