It seems a very complicated topic and of greater importance depending on what stands out from the different talks or seminars of designers in which I participated. Here I am going to give you some theoretical guidelines that will allow you to clarify your doubts.
First step, be aware that in whatever way you are working (in an office or in the kitchen at home, alone or with a team), you are running a company to generate profits, reinvest them and grow what is different from the car -employment that serves to live day by day. If you have doubts about that, do not go any further, it is useless to complicate your life in making calculations…
Now we start, A company makes a profit when it covers all of its operating costs. But how do I know if I cover my costs when doing a job? The only calculation that counts is that of the equilibrium point.
Equilibrium point, deadlock or profitability threshold is understood as that sales figure in which the company neither loses nor wins; that is, when the company covers only all of its expenses.
How to calculate the breakeven point? Very simple
The operating costs of a company are composed as follows:
- Fixed costs (CF). They are those that the company will have regardless of whether it sells or does not sell and the volume of business it carries out: Salaries, Social charges or monthly monotax fee, Light, Gas, Rent, amortization of equipment, Hosting of a website, Subscription telecommunications company, Insurance, Interest on loans…..
- Variable costs (CV). They are those that are based on sales: Viaticals, Telecommunications, Purchases digital supports (CD, stationery,…), Contracted services (printing, workshop,…), Sales agent commissions, Financial expenses (Commission banks by bank transfer, for receiving payment by card,…). Ideally, keep your variable costs at 30% of sales.
Let's take an example that will facilitate understanding.
Ricardo is a recently graduated graphic designer. To start his activity, he created an institutional website to communicate his services, bought equipment and works from home.
He considers that for the first year of work, a monthly salary of 1200 pesos will be assigned, including social charges. Pay a monthly rent of 700 pesos (insurance included). Your investment in website programming and equipment purchases totals 5,000 pesos. The set Luz + Gas + Fertilizer Telecommunications company + Hosting Website adds 200 pesos / month.
The idea is to calculate the total Fixed costs + Variable costs over a minimum period of 1 year.
We start with fixed costs (CF)
The purchase of machinery and equipment is an initial investment that follows the concept of amortization. Let me explain, all equipment has a life span, in general it is considered between 3 to 5 years. The website, even being virtual, can be amortized, because it has a life span as well.
Every year, the equipment is despised until it is worth nothing or it is deemed not worth anything, there you need to buy another machine.
Ricardo thought of a repayment period of 5 years. Which means an annual amortization of 5000/5 = 1000 pesos.
* This amortization amount is considered as a cost because it represents the sum that Ricardo would have to put aside each year to buy a new machine in 5 years. Obviously, if the value of such equipment in the market drops or rises, the amortization amount will be adjusted based on.
So, Amortizations: 1000 pesos / year
Salaries: 1200 * 12 = 14 400 pesos / year
Rent: 700 * 12 = 8400 pesos / year
Electricity + Gas + …… = 2400 pesos / year
So CF = 26,200 pesos.
The break-even point corresponds to the following equation: Sales - (CF + CV) = 0
We decided that variable costs would have to be kept at 30% of sales for the company to be viable (CV = 0.3 * Sales).
We have then: Sales - CF - CV = Sales - CF - 0.3 * Sales = 0
That is, 0.7 * Sales - CF = 0
Sales = CF / 0.7 = 26200/0, 7 = 37 429 pesos.
37,429 pesos is the amount of sales that Ricardo has to reach to neither win nor lose money.
It is considered that in a year, you can not work more than 1840 hours / person (obviously it is not like that !!!) but it is used as a theoretical calculation base (46 weeks * 5 days * 8 hours)
So, for each hour of work, Ricardo would have to charge at least:
37 429/1840 = 21 pesos / hour.
With this hourly price, Ricardo will not win, nor will he lose money. However, the idea of a company is to generate profits, that is, to have Sales - (CV + CF) = Business profits.
In general, a profit margin is considered, after cost coverage, around 30% of sales.
We consider a profit margin of 32%. The calculation becomes like this: Sales - (CF + CV) = 0.32 * Sales.
Ie Sales - CF - 0.3 * Sales = 0.32 * Sales
0.7 * Sales - CF = 0.32 * Sales
0.38 * Sales = CF
Sales = CF / 0.38
Sales = 26,200 / 0.38 = 68,947 pesos.
To achieve a profit margin of 32%, that is 22063 pesos of profits at the end of the year, Ricardo would have to collect:
68 947/1840 = 37.5 pesos / hour of work.
Conclusions
1. This hourly amount is a working basis. It is obvious that every project cannot be charged per hour, sometimes it is necessary to quote a lump sum. However, they will realize that it will help them a lot when it comes to budgeting.
2. All budgeting has to be based on this calculation but it is not enough. A service budget may not be as standard, but sometimes you will miss an opportunity to do a good business. The second stage consists of identifying the value perceived by the client regarding the service provided. This stage has more to do with sales strategies (In case of interest on the subject, send an email with your information to [email protected])
3. This calculation can be adapted to any company structure, only the amounts of Fixed and Variable Costs will be updated, and obviously, as more people are working, the number of hours available per year.
