Break Even

 

Break Even

As a term, break even can be misleading. It can be misleading because it does not take into consideration risk. If you start a (small) game studio with $100,000 and after one year you have $100,000 you are said to have broken even. But that’s a snapshot at that particular point in time. If you reinvest that $100,000 and after yet another year you still have $100,000 you should probably be a little worried that you profited zero dollars for two years in a row.

If next year you take a 30% loss (war chest down to $70,000)  that’s an enormous hit. You can’t sustain another full year of operations and it may snowball from there. You’d really like to go to a 30% profit, but that’s as obvious as it comes. If you ever wondered why business people seem so obsessed with growth this is why; there’s a lot of truth to the idea that you’re either growing or dying.

 

Full Time, Fun Time

Last year I calculated the cost of hiring (local) full time employees as an employer based in Connecticut, USA.

For a $60k USD salary the total cost to me would have been around $75k. That’s pretty close to a bare minimum including FICA, unemployment, Medicare, worker’s comp, 401(k) contributions, insurance, et cetera. That does include some benefits that are not government mandated such as dental.

For a $30k salary the total cost would be about $45k.

Those are 1.25 and 1.5 cost to salary ratios, respectively – not all employer costs are percentages of salaries!

The costs are going to vary a lot by location, and what kind of hardware and software and miscellaneous other fees are required to keep the company running. For example if I require Unity Pro that’s an additional $1,500 a year per employee.

Let’s say they do. Let’s say I also hire two full time $30k salary employees for a project, and I pay myself $30k a year as well. So that’s 3 * $45k + $4.5k = $139.5k of costs a year. Let’s round that to $140k for simplification.

Let’s further say the team works really well and we churn out a pretty okay game in one year. Well what does the company need to gross in order to “break even”?

 

Avocado Maths

Sometimes you just need to get down to the nitty gritty details, even if one party dislikes math.

Avocado Maths
Avocado Maths

Industry standard platform cut is 30% of gross revenue. Tax rate is variable/progressive (in the US) but let’s call it 20% of net revenue.

Aside: At least in the US, unless you are making a ton of money it should not be this (20%) high. You should definitely be able to reduce your taxable income. I just spitballed it as a high ceiling to make the math easier to digest and it’s better to be conservative at this level anyway.

So let’s say you net 56% of gross. That comes out to $140k/0.56 =  $250k to break even. There were three people working on this game, and assuming we value all of them equally each person needs to generate 185% of their cost just to break even.

But no one invests X dollars to only get X back. You expect some profit, Y. If we expect an annual 30% profit how does that affect our gross requirement? Each employee costs $45k and we expect a 0.3 * $45k = $13.5k profit. With three employees each costing $45k that comes out to 3 * $13.5k = $40.5k.

That comes out to $40.5k/0.56 = $72.3k gross revenue on top of the break even, or $322.3k total gross revenue for a 30% profit. Because of all the rounding this actually comes out to ~29% profit. Whoops!

But if you pull that off in this simplified example you’d start the year off with $140k and ended up with $180.5k. That’s not too bad!

 

Per Employee

From the employee’s point of view, they’re getting paid $30k a year. This is not a great salary, all things considered. From that they need to generate $83.3k worth of gross revenue for the company to just theoretically justify their cost. That goes up to $107.4k to hit 29% profit.

Aside: Companies (should not) hire employees to merely “break even” because again there is an associated risk involved that is not imputed into that term, and also because why would anyone want to spend X > 0 dollars to earn zero return?

This is pretty normal, and it’s also one of the reasons productive employees start thinking about saving capital to strike out on their own. I mean if you could theoretically generate $107.4k gross profits by yourself even with the 56% net that’s about $60k. Even taking into account your full compensation/cost to employer that’s a $15k raise*.

Aside: *You know, aside from the fact that you probably worked your ass off to get that raise. There are very few (maybe no) jobs that migrate exactly from 9-5 worker to 9-5 entrepreneur with a pay increase and no associated work/time/effort increase. The only way I can think of this happening is if your employer was really screwing you over on compensation; That’d be about a 33% compensation shortfall in the above scenario, less in terms of a salary shortfall with similar math.

That said there are other variables: you lose any leverage you had working in a company with company resources, you lose cost efficiencies on things like insurance and supplies. You’re working for yourself, which is quite different from a Monday-Friday, 9-5 gig. You need your own capital. You own all the company decisions. But you keep your intellectual property, and if you do strike oil you can reap all (or most or more of) the profits.

 

Steam Marines

The total cost of Steam Marines 1 was $97,913.88 USD which covered a development period of about 2.5 years from 2012-2014. It hit break even in 2014 and has been generating profits since.

Aside: Back in November 2013 I wrote that I projected that Steam Marines 1 would cost around $160k USD to develop. Off by about 40%. Estimates, amirite?

Steam Marines 1 Release Date Estimate
Steam Marines 1 Release Date Estimate

The to-date contractor cost of Steam Marines 2 is $82,607.54 USD which has been in development for about 24 months from 2014-2016. That comes out to about $3.4k per month on contractors alone. Alpha release should be Q4 2016 but so far it has generated no revenue through sales of the game as it is not yet available. It also has approximately another 24 more months slated until full release. The costs are unlikely to be linearly correlated with the last 24 months (see Steam Marines 1 mid-project estimate!) but the game will inevitably cost more than its predecessor at this point.

 

What If

What if, instead of hiring contractors, I hired full time employees instead? As a rough guideline let’s take that 1.25 cost to salary ratio we calculated earlier in this post. Let’s further assume that, had I gone that route, Steam Marines 2 would take only 2 years to complete instead of the 4 it’s currently slated for.

I said Steam Marines 2 costs would unlikely be linearly correlated, but let’s assume they are. That would mean that my contractor costs would be $165,215.08 at the end of 4 years. I have four part time contractors, but two of them have a lot larger asset load than the other two, so let’s round that to what would be approximately 3 full time employees. Well, that $82,607.54 spread across 3 employees over 2 years (as opposed to a projected 4 years) comes out to about $27.5k annual salary per employee.

Which is kind of bogus, because it’s already below the pretty low $30k in our previous examples, and that’s just salary, not including other compensation! If they were paid the still-not-great-salary of $30k and cost the company $45k, that comes out to 3 * 2 * $45k = $270k.

$270k is a lot more than $165k (64% more!), even accounting for shaving two years off the project development period. If I discount my own work at their rate of $45k a year I could cut off $90k from the total project cost. Although I also have to add my own work rate onto the project cost for the first two years. Steam Marines 2 now costs $360k after two years in employee compensation.

Additionally employers are generally expected to pay for many costs such as office space, hardware/software, and other overhead for full time employees. Contractors generally work off their own relevant resources, e.g. their own computers, out of their apartments, et cetera.

This is all also assuming that:

  • Full time employees would finish 50% faster, which seems extremely optimistic.
  • The project would hit its 2 or 4 year full release date without significant delays.
  • The linear extrapolation of cost is accurate.
  • Those three contractors accept that really-quite-bad $30k/year salary for the project duration of 2 consecutive years.
  • I can actually round 4 part time contractors to 3 full time employees*.

Aside: *Extremely unlikely. My four contractors are 1) character animator, 2) environment artist, 3) portrait illustrator, and 4) audio. I wear all other hats.

These are four fairly different roles, and while I believe 1 & 2 could perform some similar duties to one another, they’re also the two I mentioned with the higher asset loads. No, in real life if I’d run with 1-2 full time artists and contract out miscellaneous art and the audio.

People are not cogs.

So that’s why I paid contractors instead of hiring full time employees for Steam Marines 2.

 

 

Thanks for reading,
Mister Bums

You can contact me at [email protected]Twitter, or leave a comment below!