What’s your daily nut to crack? 

That’s a question I often ask business owners.

What I’m searching for is, “How much do you need to sell today to break-even?” Fixed costs are the shell. Inside the shell are tasty profits.

Break-even is sales revenue number your business must surpass to make a profit.

Most business owners don’t know the answer to my question off the top of their head. But I help them identify the number using their business’ Profit & Loss report. After we identify the nut, business owners rarely forget it.

It may sound complicated, but it’s not. Break-even analysis lets you know how many hamburgers, stampings, books, or hours of consulting you must sell each day in order to cover your costs.

The formula for Break-even = Fixed Cost/Gross Profit.

For example, if the daily fixed cost to operate a business is $500 and the average Gross Profit percent is 25%, the daily nut to break-even is $500/.25 = $2,000 . You’ve got to sell $2,000 every day to cover fixed costs before you make a profit.

Why do I ask, “What’s your daily nut?”

• It’s a good conversation starter.
• The answer is useful.
• Helping a business owner answer the question is a simple way I can help.
• The bigger the nut, the more stress to crack it.
• Knowing your break-even is a key part of any good business plan.

Knowing your daily nut is practical wisdom. The wisdom to answer “What’s your daily nut?” with a sales number and to act rightly is distinctly practical.

If you have questions on how to define your daily nut, email TomPryor@icms.net .

Good ideas don’t always spread.

Wilt Chamberlain was a great basketball player but terrible free throw shooter. The average NBA player shoots 75%. Wilt made only 51% of his foul shots over his 14 year NBA career. The 1961-62 season, however, was different.

During the 1961-62 season someone taught Wilt how to shoot free throws underhanded. The underhanded shot (see picture above) was softer and more consistent than the traditional way of holding the ball above the waist.

Using the underhanded “Granny Shot” resulted in Wilt making 28 of 32 free throws during his record setting 100 point game March 2, 1962.

But Wilt stopped shooting free throws underhanded the following year.

The reasons why Wilt stopped shooting foul shots underhanded are the same reasons why accountants stopped using Activity-Based Costing.

Activity-Based Costing (ABC) is a best-practice method defined during the 1980’s. It’s based on a simple principle: “Activities consume costs & Products consume activities”. I was blessed to be director of the research project that gave birth to ABC.

Activity-Based Costing was successfully implemented and used by such notable companies as UPS, Federal Express, Ralston Purina, and Chrysler beginning in the 1990’s to improve decision-making and profit. Yet ABC is rarely taught in college or used by companies in 2016.

The reasons why Wilt abandoned the underhand free throw are the same root causes why Activity-Based Costing is rarely used:

• Wilt was willing to change but not transform his technique. Change is often successful but soon abandoned. Transformation is permanent. Wilt’s change to underhanded foul shots ended after one year. Rick Barry, however, transformed his foul shooting entirely to underhanded for his career, resulting in a 89% lifetime free throw average..
• Accountants were willing to try Activity-Based Costing pilot projects but not transform the company costing system. The results of ABC projects from 1990-2000 were overwhelmingly favorable. But few companies transformed their costing systems to ABC.
• Wilt was not required to shoot underhanded by leadership. Even though competition frequently fouled Wilt because of his poor free throw results, neither his coach or team owner pressed him to change. A task of leadership is to create an alignment of strengths in ways that make our weaknesses irrelevant. Shooting foul shots underhanded made Wilt’s weakness irrelevant, but his coach did not make him continue in his strength.
• Accountants were not required by the CEO, CPA or IRS to convert to Activity-Based Costing. Even though ABC pilot projects consistently demonstrated more accurate and understandable cost reporting. The majority of CEO’s moved their attention from ABC to the next hot topic promoted by consultants or trade journals.
• Wilt had a high threshold of collective behavior. He refused to change unless most every other player in the league shot underhanded. Wilt was willing to abandon a better method in exchange for conforming to the majority of players. Rick Barry had a low threshold. He was willing to be a loner if the outcome was positive. Not so with Wilt.
• Accountants have a high threshold of collective behavior. By nature, accountants are conformists. If the majority of accountants and accounting software products don’t use Activity-Based Costing, then neither will they. Marketing professionals have a low threshold. They are by nature non-conformists.

Being underhanded is bad. Shooting underhanded is good. Both in the game of basketball and the profession of cost accounting.

To learn more about Activity-Based Costing CLICK HERE. To request a free evaluation of your cost system CLICK HERE.

“People are far more interested in what works than what’s true.”

This quote by Andy Stanley reminds me of my college macro-economics professor.

Professor Hayashi repeatedly said, “In theory, this is how the market is supposed to work.”

My professor taught what was true but failed to tell me what works. He taught sound theory. He drew investment curves and mathematical equations to demonstrate when interest rates drop, borrowing and investment increase.

In theory, that is true. But it did not work following the Great Recession of 2008. Business investments, jobs and GDP did not grow, even with the Federal Reserve offering zero interest to banks.

What works to bring an economy out of recession? Entrepreneurship, a word Prof. Hayashi never mentioned in class or in my textbook.

What’s true can be what works, but it’s frequently not. I’ve learned over the past 60+ years that what works and what’s true are often diametrically different. Here are some examples:

• It’s true that having a high FICO score can make borrowing money easier. What works is spending less than you make to stay out of debt.

• It’s true annual performance reviews can identify an employee’s strengths and weaknesses. What works are daily coaching sessions where your manager simply asks “What are you working on? Do you need any help?”

• It’s true that memorizing answers will get you an “A” on school exams. What works to achieve success in life is learning how to ask great questions.

• It’s true most business text books recommend every business have a detailed strategic plan. What works is a 1-page plan because it’s easier to create, communicate and change.

• It’s true that it’s good to follow your passion. What works is following opportunity. There are 5.8 million opportunities (jobs openings) in America in 2016. Don’t follow your passion, but bring it with you to the opportunities that present themselves.

Andy Stanley’s primary point in making the statement that opened this blog is this: Virtually no one that attends his church is on a truth quest. Instead, they are on a quest for what will work for them to make them happy, at peace and successful.

What truth have you experienced that does not work in your personal or professional life?