Wednesday, January 20, 2010

Calculating an Event’s Break-Even Point [Part I]

As we start off 2010 and the economy is slowly recovering, most of the planners I know are much more aware of the costs of their events and are under more pressure to ensure that they make a profit (or come in under budget). At the very least, they need to break even (or not exceed their allocated budget). These folks deal with this issue regularly, however, and have all the tools they need to track income and expenses to be able to project how they’ll do financially. And, if they are working with a fixed budget, it is relatively easy to simply tally up all of the projected expenses and compare the two numbers. You break even when your income matches or exceeds your expenses.

But what if you are planning your own event and you do not have a specific funding amount or if the event has to fund itself? How do you know when you will hit the “break-even point” and start making a profit? Well…there is an art and a science to this.

Let’s look at a key formula first (science) and then we’ll discuss how to use it (art and science). [Warning! This will involve some math but don’t panic; we’ll go through each piece of it.]

Rate Per Person = [SM + FC + (X * VC) + IC + PM] / Y

That’s a lot of variables. What do they mean?

SM = “Sunk” Money: This represents money that you spend to put on an event that you must spend whether or not the event happens. For instance, money spent promoting the event and non-refundable deposits are both considered “sunk” money. Sunk money can often be “buried” within other costs but it is something that is quite important to know, especially if cancellation of your event becomes necessary.

FC = Fixed Costs: These are expenses that usually do not change based on the actual attendance at the event. A good example here is a speaker’s fees. Typically, a speaker will charge you a set fee to present at your event, which will not change if your numbers go from 100 people up to 125 people or down to 93 people. Other examples of fixed costs include audio-visual equipment, guest rooms for speakers or other VIPs (if covered by the event), awards, etc.

X = This variable represents the number of people who will attend your event. It is not necessarily the same number as the number of people who will pay to attend your event!

VC = Variable Costs. Variable costs are those expenses that depend on the actual number of people that you plan to provide for. In other words, the total amount you will pay is affected by changes in your attendance. The classic example of a variable cost is a meal. You pay on a per person basis for meals and they are even presented that way in hotel menus.

IC = Indirect Costs: Also known as personnel or administrative costs. This represents staff salaries, office overhead, and other related expenses that may not be directly tied to the event but must be somehow “recouped” by the event.

PM = Profit Margin. Quite simply, this represents how much profit the event must make once all expenses are paid. This is particularly useful to include in cases where an event is being used as a fundraiser for other activities your group is doing.

Y = Number of participants who will pay to attend

Note: all of these variables, except for number of people (X and Y), are expressed in dollars (or whatever currency you’re using). I tend to round to the nearest whole dollar to make calculations a bit easier but it is not necessary, especially if you use a spreadsheet to do the calculations for you. It can also be tricky sometimes to know if an expense is a fixed cost (FC) or a variable cost (VC). Just remember that a variable cost is one that is based on the number of people attending, even though you may order more or less of something based on other information. For instance, if I need poster boards for a scientific presentation session, the number of boards required will vary based on size of posters, number of presenters, and the layout I want to use. However, rental of the boards is still considered a fixed cost (FC) because it does not matter if I have 100 people attending the event or 75 or 140 – attendance does not affect the cost for renting the boards.

Fill in the blanks and do the math – and you have your break-even point based on your projected attendance. Essentially what we’ve done with this equation is add up all of the event’s expenses and then divide by the number of people paying to attend the event to get a rate per attendee. This amount is the basis for coming up with a registration fee for the event and, ultimately, determining a realistic break-even point.

Next week – an example using the equation…

- Karl Baur, CMP • Project Director, RDL enterprises