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A friend of mine once defined entrepreneurship as the space where passion meets hustle.
There is a ton of truth to that statement. However, we must add a huge dose of reality as well. I want to explore one of those realities today.
If you have passion for something, you can do it as a hobby or do it as a business. So ask yourself this question:
Do I have a hobby or a business?
Answer: It all depends on your breakeven – all three of them. Three? Yes.
If you are going to grow your profit and accelerate your business, there are three levels of breakeven you need to understand in your business. Most people just look at the first or second breakeven points but miss the third – and they're passion will always be a hobby as a result.
In this article, we will cover the first level of breakeven: The Charity Line.
Lots of profit (and cash!) “disappears” because we don’t understand our breakeven well enough. So let’s dig in and understand the details.
The four keys to mastering your first-level breakeven:
- Know the cost of any materials that go directly into your final product/service
- Add in the amount you pay people to make, assemble or do your product/service
- Include anything else that goes into your product (like a label or a bag)
- Set your price at least as high as 1+2+3 above
Direct costs are those that are clearly and solely focused on building the thing you sell. If you manufacture, assemble, bake, combine or otherwise put together your product, then capture all of the money you spend on doing that. Those are your direct costs.
In my experience, a lot of small business owners understand their material costs (the stuff you pay for) but don’t really get the direct labor that goes into making and selling a product/service.
Direct labor costs are the amounts that you pay people to make/do the product or service.
What are you paying people to DO/MAKE whatever it is you sell? It doesn’t matter if they are hourly or salaried. It doesn’t matter if you outsource that work or do it in-house.
What matters is that you understand how much you are spending on average for EACH product or service you sell. We will come back later to the other people you pay. We also need to look at what you put in, just not right now.
If you purchase, repackage, manufacture, assemble, bake, combine or otherwise put together your product, then capture all of those costs that go directly into it. If you do a service for someone or hire someone to do it, capture those costs. If you nearly ALWAYS provide a bag or boxes, shipping, trinkets, whatever, capture those as well. If you pay commission, set or percentage fee or sales charge, capture that!
With very few exceptions (e.g. like promotional giveaways), you must NOT set your prices lower than level one. Otherwise you are literally paying your customers to buy your product or service. Instead of a business, you are running a charity.
And if prices are rising to replace that inventory you just sold (a.k.a. inflation), your cash breakeven charity line is higher than your accountant is telling you.
Are you ready to transform how you do business so you can keep your cash? Then don’t miss our next article on the second level of breakeven.
You work hard for your cash. I want you to keep it. If you want to talk through your business with other entrepreneurs, join the Idea Collective today!