Almost no owner of a small business knows that number. Not because it is hard to work out, but because nobody ever taught them, and because the month gets settled by glancing at the bank balance.
There is one question that separates the owner who runs a business from the one who chases it: how much do you have to sell this month to stop losing money.
Not how much you wish you sold. Not how much you sold last month. How much you need for the month to close without a loss. Everything above that line is profit.
The books call it the break-even point. At the Mesa Kiin we call it the floor, because that describes it better: below it you lose, above it you earn.
And it gets worked out on a sheet of paper. Here is how.
First: split your outgoings
This is the only step that takes any thinking. The rest is arithmetic.
Take last month's expenses and put them in two columns.
Fixed. The ones you pay whether you sell anything or not. Rent, base salaries, internet, insurance, your accountant, licenses. If you shut the doors for a whole month and the bill still shows up, it is fixed.
Variable. The ones that only exist when you sell. Raw materials, supplies, commissions, packaging, the product you resell. No sale, no cost.
Most people get it wrong in two places. The salary of someone on staff is fixed, even in a slow month. And the bank fee is variable, even though it lands as a single charge at the end of the month.
If an expense has both halves, like a salesperson on base plus commission, split it. The base goes in fixed, the commission in variable.
How much is left out of every peso you sell?
Take last month's sales and subtract the variable costs from that same month. Divide what is left by the sales.
An example with round numbers. You sold 100,000 and your variable costs were 40,000. You were left with 60,000, which divided by 100,000 gives 0.6.
That means that out of every peso you sell, 60 centavos are left to pay the fixed costs. The rest went into what that sale cost you to produce.
That number, the 0.6, is what does all the work. The technical name is contribution margin, but the name does not matter: it is how much of every peso goes toward paying the rent.
Divide, and there is the number you need
Take your fixed costs and divide them by that number.
If your fixed costs are 45,000 and your margin is 0.6, you need to sell 75,000 a month to come out even.
That is your floor. Above it you earn, below it you lose, and at that exact number the month closes with neither profit nor loss.
Three minutes of work, and you know something most of your competitors do not know about their own business.
What is that number good for?
Whether you can reach it at all. Compare it against your best months. If your floor is 75,000 and your best month ever was 60,000, you do not have a sales effort problem: you have a structural one. Selling more will not solve it, because you have never come close.
That is hard to look at, and it is the most valuable thing the exercise will give you.
What a new fixed cost costs you. Before you hire someone or rent a bigger space, divide that expense by your margin. A salary of 12,000 at a margin of 0.6 means you need to sell 20,000 more a month just to carry it. Not one peso of profit, just to pay for it.
That calculation takes ten seconds and it saves you expensive decisions.
What cutting a fixed cost is worth. It works the same way in reverse. Negotiating 5,000 off the rent is worth the same as selling 8,300 more. The first one is almost always easier.
And how much you have to sell per day. Divide your floor by the days you open. If it is 75,000 across 24 days, that is 3,125 a day. That number you can track every day, and it is more useful than the monthly target because it warns you in time.
The mistakes that throw it off
Leaving out your own salary. If you live off the business and do not pay yourself a salary, your floor is wrong. Put it in the fixed column, even if it is the minimum you can live on. A business that cannot pay its owner is not at break-even.
Using an odd month as your reference. December, a month with one unusually large sale, or one where you paid something off in a single go. Take a normal month, or better, average three.
Putting something in fixed that is not. Buying equipment is not a monthly fixed cost. Spread it out or leave it out of the calculation.
And the most common one: never working it out. Going by the feeling that the month is going well or badly, instead of having the number.
And if the number does not add up?
If you do the exercise and find that your floor sits above anything you have sold in your best month, do not file it away. That is information, and there are three things to do with it.
Cut the fixed cost, which is almost always the fastest and the one that pays off most. Raise the margin, by reviewing prices or what you pay for what you sell. Or change the structure, which is the hard conversation but the only one that settles some cases.
What does not work is waiting for a good month to fix it. A good month covers one month's gap. It does not change next month's arithmetic.
Do it this week
You do not need accounting software or an advisor. You need last month's expenses, last month's sales, and fifteen minutes.
And once you have the number, write it somewhere you will see it. Because from then on, every decision in the business gets easier: hiring, raising a price, taking a discount, renting more space. They all get answered with the same calculation.
This article is written by Fernando Núñez, partner at Kiin Hub, industrial engineer and Six Sigma Black Belt.
At Kiin Hub we have the Mesa Kiin: putting your case in front of people who know different things. Tax and accounting, labor, value proposition, process and technology. If you do not know what your floor is, bring it and we will work it out together.
Share this article