Break Even Analysis for A Service Business

Business that offers a service, rather than sell a tangible good, can also calculate a breakeven point.

The first step in determining a breakeven point for a service business is to estimate the number of billable hours for the service. This will be the number of hours you are actively employed by customers or clients.

The formula to calculate breakeven billing rate is:

\[\text{Billing Rate}=\frac{\left( overhead\text{ }costs\text{ }+\text{ }desired\text{ }income \right)}{billable\text{ }hours}\]

Billable Hour Calculations

Work hours per week = 40; weeks per year = 52
Standard holiday, vacation and sick time = 22 days; 8 hours per day
Potential billable hours per year: 2080 – 176 = 1904
Billable hours per week: 1904/52 = 36.6
Billable hours per month: 4 x 36.6 = 146

Actual Billable Hours Per Month

Not all work hours will be used for billable activities. Administrative responsibilities, maintenance tasks and travel time will use up some of the potential billable hours per week. A standard estimation is 25% of available work hours is used by non-billable work, leaving 75% of hours for billable work.

146 hours available per month x 75% = 110 billable hours per month

* Companies that keep detailed accurate records of time worked can use their own numbers in the previous calculation.

Breakeven Billing Rate

Here is an example to illustrate the calculation of breakeven billing rate.

  • Billable hours/month: 110
  • Overhead costs/month: $5000
  • Desired income: $2000 (owner’s draw)
  • Breakeven billing rate = ($5000 + $2000)/110 hours =$64/hr.

It is also possible to use the same formula to determine the number of hours of work needed, given a set service fee, or the owner’s available draw given all the other factors.

A business owner can use the breakeven billing rate to assess the viability of her/his business. For a thorough analysis the business owner needs to answer these questions:

  • Is the billing rate (per hour fee) a reasonable amount you can expect customer’s will pay?
  • Will you be able to use the full number of billable hours available to you?

If the answer to either of these questions is “no” further questions to consider are:

  • How many hours per month are you willing or able to work?
  • How many “days off” do you want or need?
  • How much time will you need for “non-billable” tasks?
  • Are there other services you can offer?

Break Even Solved Examples

If you charge $50/hour, have overhead expenses of$5000/month and draw $2000 per month, how many billable hours per month will you need to work?

\[\begin{align}& \$50=\frac{\$5000+\$2000}{x}\\&x=\frac{\$7000}{\$50}=140\text{}Billed\text{}Hours\\\end{align}\]

If you charge $50/hour, have overhead expenses of$5000/month and work 110 billable hours per month, how large of an owner’s draw can you take?

\[\begin{align}& \$50=\frac{\$5000+Draw}{110\text{}Billable\text{}Hours}\\&Draw=\$500\\\end{align}\]