The Business End of Santa Claus: Breakeven Analysis

Once the Red Suit is donned, the "Ho! Ho! Ho!" has been practiced, and the smile flashes for the first time, our role is assured; however, most of us who are a professional Santa Claus have moved on from our early efforts. We joined organizations; we attend schools, seminars, conferences, and social gatherings of other Santas. Often, we choose to improve our image with upgrades to suit, boots, belt, beard, bells, baskets, bag, and belly. When first starting out, many of us volunteered for charitable or civic occasions, for our families, and with an occasional hire-a-Santa-type event once the word got out. Now, we are busy. So, just how much should we charge? How do we know when to change our rates? Can Santa afford that new belt buckle (or fill-in-the-blank)? Do we want to make Santa Claus into a business? Should it at least breakeven? Should my fees for the next season rise and by how much?  Breakeven analysis, having income exactly equal to expenditure thus showing neither profit nor loss, gives us a planning tool normally reserved for those with an MBA. Calculating a breakeven gives us a decision-making tool to help with financial decisions, and it is simple enough most of us can figure it out once it is explored. And it applies equally to all businesses. For Expert Number Crunchers If you have some accounting knowledge, then you may just need the formula for Breakeven Analysis and a brief explanation or review. If so: Breakeven = Fixed Costs divided by Contribution Margin Ratio. The Contribution Margin Ratio is the percentage left after variable expenses are covered [CMR = 100% less the sum of Variable Cost percentages expressed as a decimal]. To calculate Breakeven, you need a pro forma Income Statement. Nevertheless, even most of us with extensive accounting backgrounds did not automatically set up a P & L (Profit & Loss Statement) when we first started out in the Santa Claus business. It just evolved. Frankly, the Income Statement (Profit & Loss) for my previous 3 seasons was just for doing April taxes. (Christmas 2007 was my 4th season.) In supplying a sample Income Statement for this article, my real business experience as an event-Santa from this past season has shaped the numbers. These numbers helped me convince Reluctant-Reindeer Debbie, my wife, that investing in a new custom suit was fiscally sound. The master plan calls for me to have developed the Santa business to be our 'mad-money' once retired in 5 years; however, she justifiably does not want me to spend more than comes in the meantime. Fixed Costs versus Variable Costs Explained The first task is to separate the expenses into columns as fixed expenses or variable expenses. Your expense categories may be very different; however, setting it up like this is valuable as a planning and analysis tool. This past year, I donned the Santa persona 34 times, of which 24 generated gross income of just over $5,000. In analyzing the expenses, think about the costs columns this way. As long as you are in business, you will have some expenses, period. For example, I have to maintain the beard and hair whether I have 1 appearance or 100 appearances, so all hair and beard maintenance costs are classified as fixed costs. On the other hand, mileage expense varies with the number and location of appearances, so it is classified as a variable cost. Another example of variable costs are candy canes; 100 kids are given 100 candy canes, and the same proportion holds for 1,000 kids, and so on. For SantaWalter, the Contribution Margin Ration [CMR] = 100.0% - 22.0 % = 78.0%. Breakeven = Fixed Costs divided by CMR = $2,570 / 0.780 = $3,296. If a desired salary of $3,000 is added to fixed costs, then breakeven plus ROI (return on investment) is $5,570 divided by 0.780 = $7,143. Naturally, Santas work a lot more hours than just guest-contact hours. In my case, I added in the cost of a new Santa Suit to the fixed expenses, and showed Elf Debbie that I could afford to buy the suit. Incremental Expenses Breakeven Another way to use the CMR is to look at how much will be needed to earn in additional revenue to pay for the new Santa suit. For every $1,000 I choose to 'invest' or spend, I will need $1,282.05 in additional revenue. Also, I can think about the storage space housing the extensive props (North Pole, greenery, decorations, Santa chair, photo backdrop, etc.). Could I spend half of the storage fee each year ($480) on temporary backdrops and then discard them each year? Many of us bill a higher rate for the first hour, which covers our overhead. If I were to bill the client for $200 for the first hour, and $100 for the next hour, I have collected up-front from each client $100 towards fixed costs or overhead. In the example above, the total fixed cost is almost covered by $100 for each of the 24 paying clients. Once the breakeven is calculated, then doing 'What-if" scenarios becomes much easier. (One caveat: these calculations only hold in a linear fashion for up to around 10% variance. If you want to do a more accurate 'what-if' with bigger changes, then project a 'pro forma' income statement [proposed budget] and run the numbers into fixed and variable columns as in this example.) Once the CMR is calculated, use it as a rule-of-thumb for on-going decisions. In ballpark numbers, I need additional revenue of $128 for each $100 I choose to 'invest' or spend in the Santa Walter Business for it to breakeven. Summarizing Breakeven Analysis The Breakeven Analysis is a powerful tool that helps with business decisions. Santas should use it; all entrepreneurs should use it. Separate expenses into Fixed and Variable costs, and then divide Fixed Costs by the Contribution Margin Ratio (100% minus total Variable Cost percentages). In my case, since I know my CMR is about 0.780 (or 78.0%), the rule of thumb suggests needing around $1280 in additional revenue to offset each $1000 in additional expenses. When planning for this next season, the new suit I want to buy will probably be in lieu of a personal draw. There should be enough money so that I am not out-of-pocket. Eventually, when retired from teaching, I will need to be more careful. So, should I raise my rates a bit in anticipation? Hmmm. Perhaps I will charge more for the first hour because my overhead costs have gone up. Should I schedule additional appearances to make it up? Breakeven analysis allows for good 'what-if' planning. So go ahead and analyze your breakeven and improve the quality of your financial decisions. It is worth the effort. 2009-02-08T06:30:05Z

2009-02-10T04:27:19Z

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the-business-end-of-santa-claus-breakeven-analysis

2009-02-10T04:27:14Z

The Breakeven Analysis is a powerful tool that helps with business decisions. Santas and all entrepreneurs should use it. Separate expenses into Fixed and Variable costs; divide Fixed Costs by Contribution Margin Ratio (100% minus total Variable Cost percentages).

The Business End of Santa Claus: Breakeven Analysis

2009-02-24T09:49:13Z