Whenever I talk about breakeven analysis, a common question is: how does this apply to service providers and not-for-profits?
A service provider doesn’t make widgets, but there are still costs.
For many service providers, those costs will be fixed. It might be hard to parcel out variable costs.
Let’s use my practice as an example. My software costs are fixed. My software company charges me the same amount regardless of whether I prepare 1 tax return or 1,000 tax returns.
The only variable cost that I have that I could identity is postage. All of my other costs exist regardless of the number of clients I serve.
But I can still do a breakeven analysis.
Let’s say a service provider has fixed costs of $50,000. They have no real variable costs.
Where to begin on determining a breakeven?
It depends on how the provider wants to break down their service offerings. Do they break it down per customer served, per job performed, or per hour?
Let’s say the provider knows they can provide 1,200 billable hours in a year. $50,000 / 1,200 = $41.67. The provider would need to charge $41.67 per hour in order to break even. Obviously, they’d want to charge more than $41.67 per hour so they turn a profit, but $41.67 is the minimum.
It’s a little trickier for not-for-profits to perform breakeven analysis, since not-for-profits don’t sell products or services.
But a not-for-profit has fixed costs. Rent, utilities, salaries. They may have some variable costs associated with fundraising (postage, other fundraising expenses).
A not-for-profit may not do a true “breakeven analysis.” But if they know that their fixed costs are $100,000, then they need to get a plan in place for raising at least $100,000.
If a not-for-profit knows that a particular mailing will cost $10,000, then they know they need to raise $10,001 in donations from that mailing in order for it to be worthwhile.
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