- To repeat, $18,000 fixed cost of the car
divided by $210 per person that the charity gets to keep
means that 86 people need to come to the banquet
in order for the charity to break-even.
Now that's a very interesting and useful number.
Let me ask you,
do yo think that the charity performed
this simple break-even calculation?
You can see this is not a very difficult computation.
Did they do it?
No they did not.
When I said to Ramona, well you have to have 86 people
come to the charity banquet to break-even,
she said, what are you talking about?
It hadn't even crossed the minds
of the planning committee that they had to have
a certain number of people come to the charity banquet
for it to break-even.
So why didn't they think of doing
this simple break-even analysis?
Well may people think that numbers are boring.
Starting a business or organizing a charity banquet,
now that's fun, that's exciting,
but numbers, those are boring.
Plus, some people are afraid of numbers.
Numbers are scary,
and many people just don't even think
of using data in making decisions.
This is why we need to know
a little bit more about accounting,
because it helps us structure our decisions
a little bit better.
Ramona and her planning committee
hadn't even thought about this break-even number
it's a good practice to gather data
and do some analysis when making decisions.
So what happened with the charity banquet?
Well here's the bad news.
At lest for me, from an accounting standpoint.
You see, I've been trying to inculcate into Ramona
the importance of these accounting computations
for low these many years.
We've been married 38 years now,
but she still just goes ahead and ignores me
and my calculations.
The problem is that she is always successful anyway.
With respect to the banquet,
they had hundreds of people attend.
It made a whole gob of money.
Ramona wondered what I was worrying about
with my break-even calculations.
So I lost my credibility with her,
but hopefully I haven't lost my credibility with you.
It's at least worth checking the numbers
to make sure that you've got a chance of breaking even.
One huge benefit of financial analysis in general
and break-even analysis in particular
is that it can counteract the natural
over-optimism of entrepreneurs.
You'll find that most decisions are somewhere in the middle
and you've got to use your judgment.
But at least the accounting analysis
has helped you structure the decision,
and has forced you to gather data
so you're not making a decision
based on just your optimistic view of life
as an entrepreneur.
By the way, one of these days,
after years, Ramona's judgment will lead
to a bad decision,
and I'll be able to say to her, see, I told you so.
You should have paid attention to my accounting analysis.
That hasn't happened yet.
Break-even analysis is a very simple intuitive way
to understand business decisions.