The Break-even point is a concept used in financial analysis that helps businesses determine the precise point at which the total costs and total revenue of the company are equal. As a daycare business owner, you can calculate the financial break-even point for your business to determine whether your current revenue is sufficient to cover all of your expenses. More than that, the break-even point will help you measure how much of your revenue is contributing to your profits. The following guide will explore why the break-even point is a useful tool for your childcare business, what information you will need to determine your break-even point, and how to calculate the break-even point for your business.
Advantages to Knowing Your Break-Even Point
Once you determine the financial break-even point for your daycare center, you will gain a wealth of information about the overall health of your business. The break-even point will allow you to see whether you are operating your business at a profit or a loss, and by how much. If you are planning to open your daycare business for the first time, or if you are considering expanding to a second location or larger facility, forecasting the break-even point will allow you to see how many months it will take you to break even with your anticipated revenue. In addition, the financial break-even point helps you to leverage your profits and reinvest money into different facets of your business, such as staff raises, additional hires, or facility upgrades. Finally, you can calculate the break-even point for specific programs you offer at your daycare business, such as your infant program or your preschool program. You can use the information you learn to offset the costs of your more expensive program (usually infant care) with higher enrollment numbers in your more lucrative programs for older children.
Determine Your Fixed and Variable Costs
Before you can calculate the break-even point for your childcare business, you will need to determine your fixed costs and variable costs. The fixed costs of your business are those that remain constant regardless of the number of children enrolled in your program. These costs include such things as your rent, insurance, and staff salaries. The variable costs of your business are those that depend on how many children you have enrolled in your program and include things like arts and crafts supplies, food, or insurance.
You may discover that you need to lower your break-even point in order to make your childcare business more profitable. You can always come back to your fixed and variable costs as you consider how to reduce your break-even point; reducing either your fixed costs or your variable costs will help you achieve this.
Calculate the Financial Break-Even Point
There are two different ways to calculate the financial break-even point for your business, and we will outline both methods below. One way is to calculate the break-even point in units. In the case of your childcare business, the unit sales price would be the cost of enrollment for one child for a specific timeframe, such as one day, one week, or one month. To calculate the break-even point in units, you will use the following formula:
Break-Even Point (Units) = Fixed Costs / (Sale Price Per Unit ? Variable Costs Per Unit)
Here is an example:
Let?s say you have determined your fixed costs for the month are $2,400.
You calculate your sale price per unit, or the cost of one child?s daycare spot for a full day, to be $40.
You also calculate your variable costs per unit, or the variable costs associated with one child?s daycare spot for a day, to be $10.
To determine the break-even point in units, you will plug in your own figures into the formula: $2,400 / ($40 – $10) = 80.
Thus, in order to break even, you must enroll 80 full-time equivalent children in your program.
Another way is to calculate the break-even point in sales dollars. To calculate the break-even point in sales dollars, you will use the following formula:
Break-Even Point (Sales Dollars) = Fixed Costs / Contribution Margin.
The contribution margin is a term used in business to denote the difference between the price of a product or service and the cost of making or providing that product or service.
To calculate the contribution margin, you will use this formula:
Contribution Margin = (Sale Price Per Unit ? Variable Costs Per Unit)/Sale Price Per Unit
Using the same figures from the previous example, you could determine the break-even point in sales dollars:
Contribution Margin = ($40 – $10) / $40 = .75
Break-Even Point (Sales Dollars) = $2,400 / .75 = $3,200
In order to break even, your daycare business would need to make $3,200 for the month.
Either figure will be helpful to you as you determine how to maximize your revenue and lower your break-even point if necessary, either by enrolling more children in your program, or by reducing your fixed or variable costs.
Honest Buck Accounting is here to help you discover how to make your childcare business more profitable through our Profitability Coaching services. In addition to helping you determine your financial break-even point, we help you forecast and plan ahead to next quarter?and next year?so you can have the peace of mind that comes from a strategic financial plan. Schedule a discovery call with one of our expert team members and learn how we can help you achieve your business goals.