According to Wikipedia, “Tax Freedom Day is the first day of the year in which a nation as a whole has theoretically earned enough income to fund its annual tax burden.” There are separate Tax Freedom Days calculated for each state. For example, in 2011 the Tax Freedom Day was May 2 in Connecticut and March 26 in Mississippi. This means that Americans will work between three or five months a year simply to pay off taxes.
It occurs to us that similar figures can be calculated for individual companies to help them understand when they’ve attained their “nugget,” that is, the dollars of gross profit required to cover the year’s overhead. We call it Overhead Freedom Day. Remember that every incoming sales dollar will be distributed in only one of three ways: production costs, overhead costs, and profit.
Once you have covered your overhead for the year, all the dollars left over after production will drop directly to your bottom line. You can use some relatively simple projection techniques to find out when you will achieve Overhead Freedom Day in your own company.
To determine your Overhead Freedom Day, follow these simple steps:
- Identify your overhead
- Calculate how many dollars it takes to sustain the company for a year
- Identify your target sales figure for the year
- Look at your sales to date, then consider your pipeline and estimate your total sales this year
- Identify your gross margin
- Determine the average gross margin that you will achieve this year
- Calculate your “Overhead Freedom Day”
1. Multiply your projected sales by your gross margin to determine your projected gross profit in dollars.
2. Divide by 365 to determine the gross profit dollars earned per day.
3. Divide your projected overhead by the result to calculate the total number of days required to cover overhead.
4. Divide the above number of days by 30 to determine the month in which you will achieve Overhead Freedom. Or, you can use an online day-number calculator.
As we come down to the home stretch of 2011, now is the time to calculate your own Overhead Freedom Day. Have you reached it yet? If not, it’s not too late to make adjustments.
—Leslie Shiner, owner of The ShinerGroup, has over 20 years of experience as a financial and management consultant. Melanie Hodgdon works with clients to generate realistic solutions that reflect the resources and style of their companies. They co-authored A Simple Guide to Turning a Profit as a Contractor.