I will begin today’s conversation, it would seem, from a completely different, but, believe me, very important point. Many mistakes are made by both beginner and existing entrepreneurs when planning their business, when they ineptly try to use the knowledge gained from academic textbooks in their calculations, and almost all textbooks on business planning and economic analysis have a section devoted to the so-called break-even point business. The essence of it (section) is as follows. All expenses (textbooks “tell us”) are divided into variables and constants.
Variables are those expenses that increase in proportion to the growth of production or sales. As a rule, they include the costs of raw materials and supplies, the purchase of goods, piecework wages. And constant – this is the part of the costs that does not depend on the volume of production or sales (AUP salary, rental of premises, utility costs for the office, stationery, etc.).
Based on this, the break-even volume of production (sales) is calculated according to the following algorithm: for example, fixed costs are 1000 rubles, variables per product unit are 100 rubles, and the selling price is 120 rubles. Having sold 50 units of the product, we will cover our fixed costs, i.e. “Go” to the breakeven point. Each next sold unit of production will bring us 20 rubles of profit. It would seem that everything is simple: they sold 100 units – they received 1000 rubles of profit, 150 units – 2000 rubles, etc. But there is one “but” …
This happens only in textbooks, in life everything is different. In a real business, there are no fixed costs, all costs change with the volume of production or sales, only at different speeds.
The Rule of Five Wallets does not divide expenses into fixed and variable, but into the following:
Cost – the cost of acquiring someone else’s, not created by us value;
“Current Purse Wallet” or “Today’s Wallet”, which includes paying for everything that is impossible without the daily functioning of the value creation process;
“Development Wallet” or “Tomorrow’s Wallet”, from which the expenses sent “tomorrow” are paid;
“Salary wallets”, which we have already examined in detail in previous issues.
Accordingly, the break-even point for an entrepreneur under the Rule of Five Wallets is completely different from what is described above. What about?
numbering-small.png Living wage or opportunity
We have already talked about the official living wage set by the state. An entrepreneur is also a person, and he also has his own living wage. The only difference is that this minimum is not set by the state, but by the entrepreneur himself. And if his monthly expenses (as a person) for a family, food, an apartment and a car are 30,000 rubles or a little more, then this is the minimum income necessary for an entrepreneur to live. Of course, because of 30,000 rubles of income, things are not being conceived, this is the salary of some of our future workers, but nevertheless, this indicator (your minimum subsistence level) should always be known as a guide for the most pessimistic (unprofitable) plan.
The breakeven point for the entrepreneur is the size of the possible alternative income. This may be the salary of the employee (and most entrepreneurs are highly qualified, therefore, expensive specialists), or another matter, or some calculation of the cost of their time resources that the entrepreneur puts into the business. It’s temporary, since assessing entrepreneurial abilities is a priori subjective occupation. So this very indicator of alternative income is the entrepreneurial breakeven point! If your business brings you less income than the alternative – you are at a loss!
numbering-small.png Owner’s wallet size
At my seminars on the Rule of Five Wallets, I usually joke that the maximum of this wallet depends on the greed or unreasonability of its owner (entrepreneur). We will definitely determine this maximum, only a little later, when we will build the structure of all five wallets, and today let’s discuss the minimum, i.e. about the minimum share of the created value, the entrepreneur will be “interested” in this business.
It is clear that this value depends on the size of the business. The least that I met in my practice is 6%. But it was in a very large holding with a multi-billion dollar annual turnover. The arithmetic is simple: even if you have the lowest profitability, at 10%, a turnover of one billion creates a value of 100 million rubles, 6% is 6 million. Each “next” billion brings another 6 million rubles. I can’t say that the owners of this business were too satisfied with their six percent, but they “tolerated”, they didn’t “get into” other wallets.