The difference between a good business and a great business is normally just a tweak or two.

Now about 20 years I remember sitting in a lecture thinking that the concept of Break Even Analysis was just a little too basic and boring. Accountants describe the Break Even Point is when:

When n x sales = n x variable costs plus fixed costs.

Or even more plainly, when:

Revenue = variable costs + fixed costs.

Now I thought this was a little t0o basic and boring because it gave me a fairly obvious goal,  but as a business owner, it didn’t help me figure out how to get there and there was no point doing things to simply “break even”. Fast forward twenty years though, and I have picked up the tweak along the way that makes all the difference. The key is realising that the break even point is very psychological. In more than one organisation I have worked in, I found staff tended to start cruising as soon as they get to their break even point, as they are then revenue neutral.

But from the owner’s point of view, their break even point needs to include a return for undertaking the activity in the first pace and taking on risk. Therefore, I now see and use the equation like this:

Break Even is when:

Revenue = Variable Costs + Fixed Costs + My Required Profit.

If we get revenue that exceeds what I need, we then enter the realm of super profits i.e. my upside for taking a risk.

Its not just me that uses the equation that way, if you look around you will see “My Required Profit” hidden in plain view. In the Car Industry its called “Dealer Delivery Charges” in the Telecommunications Industry its called the “Service Fee”, and in personal services it sometimes get called the “Account Management Fee”. Because when profit masquerades as a cost, nobody gets upset. Do you think the Cap on your mobile phone spending would be as palatable if it was called more accurately “your minimum monthly spending”?

When I trained as Accountant the problem was the the tools where never described from the point of view of “Here’s how you tweak it to make a sh*t load of money”. Perhaps if they were, I would have paid more attention.