Working out your break-even number

Every month starts in a hole. Rent is due, insurance is due, the truck payments go out, the office gets paid, and none of that cares whether the phone rang.

Break-even is the revenue that fills the hole. Below it you lose money. Above it you make money. Most contractors have never worked out the number, which means they have no idea on the twentieth of the month whether they are ahead or behind.

The calculation

Three figures, all of which come straight out of properly kept books.

Monthly overhead. Everything that is not a direct job cost — rent, insurance, vehicle payments, office wages, software, advertising, and your own pay. Include your pay. A break-even that excludes the owner describes a business that cannot afford an owner.

Gross margin percentage. Gross profit divided by revenue, from your P&L. Use the last full year rather than one good month.

Break-even revenue = monthly overhead ÷ gross margin percentage.

If overhead is $18,000 a month and your gross margin is 32%:

$18,000 ÷ 0.32 = $56,250 a month.

That is what you have to bill, every month, before a single dollar of profit exists.

Turning it into something the crew can see

A monthly figure is hard to act on halfway through the month. Break it down.

Weekly: $56,250 ÷ 4.3 ≈ $13,100 a week.

Daily: across a five-day week, about $2,600 a day.

Per truck: three trucks, roughly $870 a day each.

That last number is the useful one, because it is something a tech can hold in his head. A truck that consistently comes in under it is telling you something — about routing, about pricing, or about the mix of work it is being given.

What people get wrong

Leaving out owner pay. By far the most common. It makes break-even look comfortably low, and it hides the fact that the business is only surviving because you are working for less than you would pay someone else to do your job.

Using a good month's gross margin. Take the annual figure. One strong month produces a number that flatters you all year.

Forgetting that overhead moves. A new truck, a hire, a software subscription — each one raises break-even permanently. It is worth recalculating whenever you add a fixed cost, because the natural instinct is to assume more revenue will cover it, and more revenue only covers it at your margin rate, not dollar for dollar.

That last point is worth sitting with. A $600 monthly truck payment at 32% gross margin needs $1,875 of additional revenue every month just to stand still. Not $600.

What to do with the number

Check it weekly, not at month end. By month end it is history. Checked on a Friday there is still time to push a quote out or fill a slot.

Compare it to your pipeline. If break-even is $13,100 a week and you have $9,000 of scheduled work, you know on Monday that you have a problem, rather than finding out in three weeks.

Test decisions against it. Before hiring, work out the new break-even including that person's loaded cost. If the revenue to support it is not visible, the hire is a bet rather than a plan.

When break-even is too high

If the number looks impossible against what you can realistically sell, you have exactly two levers.

Raise price. Usually the faster of the two, and most contractors are further below market than they believe. See pricing a service call.

Cut overhead. Slower, and there is usually less there than owners hope once you exclude things that are actually load-bearing.

Working harder is not on the list. If your pricing does not clear break-even at realistic volume, more volume makes the hole deeper.

Related

• What you should actually charge for a service call
• Why jobs that look profitable still lose you money
• How to read your P&L