Another practice is looking at a business idea in terms of the amount of revenue it needs to generate for it to be more valuable to pursue than alternate uses of our time and resources. If this is our first product, this translates into figuring when this product can pay the bills–in other words, the amount of income required to be able to quit our day job. If you dislike your job, you might call this your “freedom number” or “escape income.” Mashing up this idea with the MVP concept gives us Minimum Viable Income (MVI).
The Fizzle team has done a great job, in their blog post and embedded podcast, of describing MVI and several strategies to get to it rapidly. We encourage you to go check that out for more grounding about why figuring out your MVI is so valuable.
This article describes the MVI Calculator, a tool the Thinking Budget team has created for you to calculate your MVI scenarios.
MVI Calculator Overview
The MVI Calculator is an Excel spreadsheet; feel free follow along with your own copy by clicking here to download.
The calculator is organized like most spreadsheets you have probably seen, but if you compare this to a budget or profit & loss statement it may, at first glance, seem upside-down.
In a budget, we start at the top with our income, then we list our expenses. The result at the bottom is how much money we have left after income is consumed by expenses.
Here, our goal is to calculate an income number (our “bottom line”) based on our expenses, so we start by listing those expenses at the top.
We group our expenses into the two sections highlighted with blue shading: Fixed Expenses and Variable Expenses. In accounting lingo, we call the first group “Fixed” because they tend to be the same amount from month to month. Accountants call the second group “Variable” because those expenses tend to vary over time–either with activity (like when a business is busier) or with behavior (like when we binge on expensive coffee).
Since calculating our MVI is in the context of figuring out how much income we need to live on, our Fixed and Variable expenses here add up to our Total Living Expenses. In a perfect world, this would be our MVI. In the real world, however, there a few more key MVI ingredients. Before we go there, let’s explore our expense buckets just a bit deeper.
Fixed = Non-discretionary
In personal budgeting, our fixed expenses are those which are not only fixed amounts, but they are also spending over which we can exercise little choice; we have no discretion from month to month about how much (or whether) we spend on this stuff. This is why things like housing, car payments, utilities, insurance and loan payments are in this group.
On the other hand, the numbers here tend to be relatively large, so when we can make a change (like selling a car or moving into a less expensive place) the impact on our MVI calculation can be dramatic. We’ll dig deeper into this below.
Variable = Discretionary
In personal budgeting, variable expenses are the set of spending choices we make often–sometimes daily; we have lots of discretion about whether and how much to spend here. Food is a great example. Although we all have to eat (no choice here), we have full discretion about how we allocate our spending between groceries (eating in) and restaurants (eating out). We also can decide to eat caviar and champagne or dine on Top Ramen and eau du faucet.
Each of our Discretionary (variable) expenses tends to be smaller than our Non-discretionary (fixed) expenses, but because our spending behavior (our day-to-day choices) affects this whole bucket, those choices add up to real money. Couple this with our ability to adjust our spending behavior quickly, and this means that making adjustments here is this quickest path to lowering our MVI.
Business Costs & Taxes
The final ingredients of calculating our MVI are our business costs (the costs of being in business, making and selling our product) and taxes.
Like living expenses, business costs also have fixed and variable components. Fixed costs are things like web hosting, advertising and other expenses that are the same whether or not we sell anything. Variable business costs are expenses tied directly to making and selling our product. In the MVI Calculator, express your fixed business expenses as a number; express your variable cost as a percentage of (sales) revenue. If you don’t know this right now, make an educated guess–or better yet, spend a little bit of time to figure it out.
And who doesn’t love taxes, eh? Love ’em or hate ’em, our tax obligations are inescapable, and when thinking about our MVI, we need to think of two sets of tax obligations:
Self-employment Taxes – In the U.S., this is the amount accumulated during payroll processing by employers for Social Security and Medicare (government retirement programs). Half of that is contributed by you via withholding from each paycheck, and the other half is contributed by your employer.
- When we quit our job, surprise! We need to pay this ourselves–hence the (official) name of “Self-employment Tax”–with a price tag of about 15 percent of our income.
Income Taxes – This is what we are used to paying as an employee. To be safe, use the same rate (% of income) you have paid during he past few years–less 7 percent for your half of the (US) Self-employment Taxes you have been paying as an employee.
- Example: You paid 27 percent of your income as taxes last year. Subtract 7 percent from that, and enter 20% in the cell for Income Taxes.
Minimum Viable Income Calculation
All these ingredients create the following formula:
MVI = Living Expenses + Fixed Business Expenses + (Variable Costs × MVI) + (Self-employment Tax × MVI) + (Income Tax × MVI)
Rearranging to get all of MVI on the same side of the equation, we get:
MVI - (Variable Costs × MVI) - (Self-employment Tax × MVI) - (Income Tax × MVI) = Living Expenses + Fixed Business Expenses
Plugging in numbers (from our “Current” column) for Variable Costs and Taxes give us:
MVI - (0.05 × MVI) - (0.15 × MVI) - (0.20 × MVI) = Living Expenses + Fixed Business Expenses
which reduces to:
MVI - 0.40 × MVI = Living Expenses + Fixed Business Expenses
0.60 × MVI = Living Expenses + Fixed Business Expenses
Solving for MVI yields:
MVI = (Living Expenses + Fixed Business Expenses) ÷ 0.60
Plugging in numbers (from our “Current” column) for Living Expenses and Fixed Business Expenses give us:
MVI = (4500 + 50) ÷ 0.60 = 4550 ÷ 0.60 = 7,583
If you are a financial/algebra ninja (or if you peeked at cells C35, D35 or E35 in the spreadsheet), you have figured out that the generalized formula for calculating MVI is:
MVI = (Living Expenses + Fixed Business Expenses) ÷ (1 – (Variable Costs + Self-employment Taxes + Income Taxes))
From Caviar to Ramen: MVI Scenarios
Our insatiable joy for algebra aside, the real point of this exercise is to figure out how much revenue we need to be able to maintain our current lifestyle (the “Current” column), then explore a couple of other scenarios to reduce our MVI: 1) Modest expense reductions (the “Frugal” column), and 2) Extreme expense reductions (the “Ramen” column).
Using the example numbers in Fig. 1, we can see in the “Frugal” column that moving to a place costing $500 less per month reduces our MVI by $833. Reducing our discretionary (variable) spending by $200 drops our MVI by another $333. Toss in reduced Utilities costs, and the total MVI reduction for this “Frugal” scenario is $1,333. That is meaningful.
If we think about really pushing our limits, we can look at the “Ramen” column. Here, we take on roommates (or become a roommate), reducing our housing costs to $500 per month. Since we are splitting Utilities, those drop to $100. We have now cut another $1,200 from our Fixed Expenses, creating a $2,000 reduction in MVI. Since we’re on a roll, we can hack away at our discretionary expenses by eating cheaper and spending less on all those fun activities we won’t have time for anyway. Net result: We have cut our MVI almost in half.
These numbers are obviously not your numbers, so plug in your own and experiment with a couple of scenarios. Be sure to use your actual spending numbers in the “Current” column. If you aren’t using a budgeting tool now, spend an hour or so looking at your online banking to see your spending history over the past 3-6 months.
Maximum Viability to You
We hope this MVI Calculator helps you on your entrepreneurial journey. Let us know what you think by leaving a comment below.
You can also sign up here to follow our journey as we build Thinking Budget, a spending app that will let you focus on building your business, not burning time and energy trying to figure out where your money went.