What is Break-Even Point?
The break-even point is when the total expense (fixed expense + variable expense) is less than or equal to the amount of revenue generated from operations in a specific period of time which normally is either a month or a quarter.
So a break even month is when the total revenue generated in a month less the total expense in the same month is net positive.
Similarly, a break-even quarter is when the total revenue generated in the quarter less the total expense in the same quarter is net positive.
Break-Even Point Calculation
So how you calculate the break-even point for a web development company?
- Estimate all the fixed costs. (i.e. rent, Internet charges etc).
- Estimate all the variable costs (i.e. salary, electricity etc).
Now add both to get the total expenses.
Once the company generates revenue equal to the total expenses, it is the break-even point.
For a small software services company, the calculation of revenue can be done in many ways:
- When the projects kick off. So in May you started a project and so you add the total revenue of the project in the month of May.
- When the project is finished. Complete Delivery of project in August and you add the total revenue of the project in August and not in May.
- When the project is paid. As soon as the client makes payment, you add that as revenue for the month and not when it started or finished. If client paid in parts, you add those in revenue when it was paid.
All the above calculations work fine for small projects in small companies and ideally neither of the above should be used and we should be doing the calculations based on the amount of work done on a project in the specified time.
So if a project started in May and 40% of it was completed in June, 40% of the total project’s revenue value should be added in June’s revenue. Estimating 40% of work was done in a month can be tough as well but that is how it should be done.
If you don’t know your break-even point, you don’t know your business and you are doing it all wrong. Even today I know my break-even point and what’s the minimum I need to earn in a month to break even and often the bear minimum earning happen in the first week of the month itself.