Accounting - Breaking Even

Published on 27th August 2019

Accounting - Part 2

In Guiding Principle 4 we started to look at accounting. It is crucial that you get to grips with at least basic book keeping and financial control, to ensure that you are not overspending or undercharging.

It is also important when you are putting the business plan together to ask lots of “what if” questions that may feel uncomfortable and possibly even a little demoralising but need to be addressed to ensure you have a Plan B.

If you look at all successful business people they will have had things go quite “pear shape” but have had a Plan B to fall back on.

It is almost as if you need to plan to fail. This sounds like very negative thinking which does not come naturally to me and I hate advocating it to you. But we do need to have to think through worst case scenarios in advance. That way we can prevent them from happening or respond appropriately rather than react with panic if they do happen.

 

For example if you plan to work from home- what if you move? Will you have to start your business over again?

What if you suffer a serious illness or injury?

What if you don’t meet your sales targets?

What if someone sues you for malpractice?

What if your expenses are much higher than envisaged?

What if a major competitor seriously undercuts you?

To start this process it is important to understand what your break even is.

Break even

In a nutshell it is the point when all costs are covered

It is up to you to decide whether you constitute a cost or whether you are going to just live off any profits. I would advocate you putting yourself in as a cost with a basic yearly salary to ensure your prices are realistic.

To work out the break even:

Take all your costs and divide them by the number of treatments you plan to do in a year.

Be honest here. It is better to be under rather than over optimistic about how many clients you will see in a year. Remember you first few months you are not going to have full appointment diaries.

The break even point is

Costs (overheads) x sales divided by gross profit

Remembering that gross profit = sales-cost of sales

And overheads= cost of sales+fixed costs

See Guiding Principle 4 for a reminder of these terms.

Once you break even, everything else is profit and you will be able to pay yourself more from the profits. It is a good idea however to keep some money in reserve for business development and for lean times. You must also put aside money to pay your tax, national insurance and VAT.

I would advocate a Contingency fund in case you are off sick, the cash flow becomes  negative if you suddenly pay out for a large piece of equipment or there is an unforeseen event. This is also known as working capital.

Also allow for depreciation you are likely to need to replace a piece of equipment every 5-10 yrs. Budget for it each year to ensure you have the funds for it.

 

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