This transcript was generated from the episode audio and may contain minor errors.
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How do you calculate the breakeven point of a business? Important question here for anybody starting a new side hustle or small business. Welcome back to Side Hustle School. Today, we're gonna help a social media manager calculate her breakeven point, learn how to apply this essential business concept to a service-based business. It's gonna help you when you're trying to figure out, is this the right business I should go into?
Or if I've been doing it for a while, should I keep it up? Or try something new? Let's walk through how to figure out what that point is and how this knowledge can help you make better choices. I make this show for you every day and I always try to give you a point of action, a point of action or strategy or practical tip. So let's talk about it.
How do you calculate the breakeven point? That's today's topic coming up after the quick break. [Music]
Hey there, this is Jamie from Phoenix. I've been running a small social media management business for about a year now and sometimes it's great, but other times it's been a real struggle. So here's what I'm wondering.
I've been hearing about how important it is to know your breakeven point, but I'm not sure how to figure it out for my kind of business. I don't sell physical products. It's all services like managing accounts and creating content. How do I calculate when I'm actually breaking even and how can I use that info to grow more strategically? [Music]
Jamie, thank you for bringing this up.
I want our listeners and new side hustlers to be able to understand what the breakeven point is from day one, ideally not until it's been months or a year in. So we actually have a couple episodes coming up in the weekend workshop format. I think one in about a week or two that is kind of breaking down the math and giving you a really simple template you can use to get a clear answer on this. But let me just give you a couple of points right off the top. Number one, understand you're fixed in variable costs.
So fixed costs are the costs that say the same every month, like no matter how many clients you have. You've probably got subscriptions you need to pay for. Well, those cost $20 a month or $50 a month or whatever they do. And then you've got variable costs, which change depending on how many clients you serve. So you might have some freelancers that you hire for specific projects or costs for paid ads or boosted posts or something.
But whatever it is, you want to calculate your breakeven point, use this formula, breakeven revenue equals fixed costs divided by gross profit margin. So your gross profit margin is the percentage of revenue left after covering the variable costs, all right? And I don't want to make this complicated. We need to keep it as simple as possible. So to get to your breakeven point, you need to set clear revenue goals.
If you know you need $2,500 to breakeven, well, you can plan to exceed that consistently to turn a profit. And if your breakeven point feels too high, consider whether your pricing is sustainable. You might need to raise your rates or reduce variable costs somehow. Like there's always a variable you can tweak to get to the formula that works for you. And if you can't do that, then you're in the wrong business or you need to make a major structural change.
Now, here's a big tip. Build a buffer into your pricing to account for slow months or unexpected expenses. Most service providers, especially new providers, always under priced because they don't account for some of these costs that kind of come up later or creep up on you, or you're just not thinking about. And so this happens a lot where you think you're making money and you realize you're actually not. This is why I sometimes talk about the profit first model from my friend, Mike Michalowicz, basically a way to help business owners from the inception of their business create profit or build profit into it.
So in short, your breakeven point is the amount of revenue you need to cover both your fixed and variable costs. So you calculate it by thinking about your profit margin, your expenses, then you use that insight to make decisions like pricing, set your goals, and hopefully grow with confidence. Listeners, I know this stuff is not always easy, but we want to simplify it as much as possible. Starting a side hustle or operating a small business really can be a lot of fun. And so you just want to figure out some of this basic stuff so that you can then go and focus on what you are best at.
Most of us, at least, are not best at figuring out some of these things, or if we are, we're in a different kind of business. So we need some help. We need to kind of get these basics down so that we can, as I said, maximize elsewhere. All right, that's it for today. If you have a question or comment, you know where to go, sidehustleschool.com.
Of course, much more is coming up. We're going to talk about consignment sales tomorrow. We're going to talk about pop-up picnics next week, bouncy castles coming out, DIY science kits. There's just so much more. And I'm so honored to make the show for you every day, always completely free.
That's all for now. My name is Chris Guillebeau. This is Side Hustle School. [Music]
From the Onward Project.
