The Business End of Santa Claus: Breakeven Analysis

Once the Red Suit is donned, the “Ho! Ho! Ho!” has been practiced, and the smile is 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 an Income Statement or a Profit and Loss Statement (as opposed to a Balance Sheet, which deals with assets, liabilities, and net worth). And now for the legalese: please do not consider this as legal or accounting advice; see your own attorney and/or accountant for specific help. Of course your situation is different.

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, if you are like me. Even those Santas who are not “in it for the money” should benefit from a financial breakeven analysis. 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. Because of not yet retiring from my day job, events drive the scheduled appearances rather than mall hours. In the 34 appearances, total time with clients averaged just about 2 hours per event, with several appearances on a single weekend day.

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 bleach 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. (Granted, some mileage could be classified as fixed, if you want to work it out.) 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. Naturally, as an aside, my cash flow exceeds the “Santa Net Profit” since the storage is paid out of day job income, and the first Santa Suit is paid for.

Here, you can see a graph where $ dollars are plotted against $ dollars. Notice the $5,220 on both the X-axis and Y-axis, going up and down as well as horizontally. Fixed costs are horizontal, since theoretically, once you incur a fixed expense, it is due and payable even if you have no revenue at all. For example, as a Santa, once I plunk down the money and buy a Santa suit, it is a fixed expense, whether I have two paying clients or if I have 50. The black arrow points to the point on the graph where the fixed expenses are plotted: total of $2,630.

The Variable Costs sit on top of the fixed costs. They vary with the amount of business. A prime example is the candy canes. If I visit with 100 kids, and give out 100 candy canes it is proportional to visiting 1,000 kids and passing out 1,000 candy canes. The $1,145 dollars in Variable Costs are added onto the Fixed Costs of $2,630, for a total of $3,775, which is where the red arrow points. Then the RED arrow is drawn from the new origin sloping up to the point shown by the red arrow.
Please notice the Green Revenue Line, which is the total income from the Pro Forma Income Statement. It is plotted by cross-indexing the $5,200 income on both the X-axis and Y-axis, and connecting that point to the original origin on the graph, where the X-axis crosses the Y-axis. See the GREEN arrow. [Note: Where the green line crosses the RED line (shown here with a large BLUE circle) is the BREAKEVEN point. It is where the income and the expenses are even.]

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. --