It’s not what you Gross, it’s what you keep!

There is a long standing misconception that many Designers seem to believe that centers on being focused on “Gross Revenue” (the total of all design fees billed and reimbursable expenses) as opposed to “Net Profit” (Gross Revenue less all tax deductible expenses). This article will focus on those key factors that affect and impact Net Profit, and the steps you should take to ensure that you are 100% focused accordingly.

In any Graphic Design business (or any other business for that matter) you have to know the Break Even Point (BEP). Simply defined, the Break Even Point is the total amount of money you need to earn (gross revenue) in order to simply pay the operating expenses. In order to calculate the BEP we use a simple formula;

• Break Even Point = Total Fixed Costs / Profit Margin (defined below)
• Profit Margin = Total Variable Costs / Gross Revenue

We also need to define what is NOT included in the break even analysis.

Not Included:
1. If you are a Sole Proprietorship the Break-even will NOT include your owner’s draw (the owners draw or salary is NOT tax deductible).
2. If you operate as a Partnership and the partners take a Draw (as opposed to a guaranteed Salary) then the Draw is also NOT included in the Break Even.
3. If you operate as an LLC, and the Members take a Draw (as opposed to a guaranteed Salary) then the Draw is also NOT included in the Break Even.
4. The Principal on any loans that the business pays are NOT included in the Break Even, so we need to add it back.

Below you will see an Excel chart example of the business, and the calculation of the Break Even Point. We can clearly see that the initial (naïve) BEP calculation shows a Break-even of $99,905. Adding back the Owners Draw, principal on the loan and new equipment purchases for 2007, the True Break-Even increased to $196,473.

The TRUE Break-even is $96,568 more than the naïve BEP and reflects an accurate picture of what this business needs to earn to pay ALL ITS BILLS. The BEP of $196,473 gives you your Sales Goal for 2007, or $16,373 a month. Since we are more likely to be able to accurately forecast our fixed costs, calculating the BEP also gives us an accurate Sales Goal. Armed with these numbers, you have a clear trajectory towards generating enough revenue to set you on a course towards increased profitability.

Managing Fixed Overhead:
If you do know the TRUE Break-even point of your business, then you have a clear knowledge of what your SALES GOALS for the year should be. If you now manage your design firm using these goals as one your management metrics, and you do it monthly, you have a ‘template’ which will help you manage the business. The other side of this equation is managing your fixed overhead, which is the key to generating higher profits. A simple rule to remember is that the higher the fixed overhead, the higher the break-even.

It is imperative that you compare the fixed overhead of your business either to a budget, or to the same period last year. Unless you compare a number to a measurement tool (budget or last year or last month), analysis is useless, since numbers are relative. Managing your overhead against a budget (based on prior years of experience) is a critical tool to KEEPING MORE OF WHAT YOU GROSS.

If you do not have a relationship with an Accountant or a Financial Advisor who thinks this way, and is proactively involved with your business, you have the WRONG person and it is time for a change.