Finding the right simple math calculations can help you frame problems more quickly and easily. From Warren Buffett to you, everyone benefits from a little back-of-the-envelope calculation.
Did you see Titanic? The movie, not the ship. My favorite part wasn't the love story, though. Human emotions are messy and unpredictable. My favorite part was when the ship had hit the iceberg and the engineer comes up to the Captain and says, "We are going to sink. It is a mathematical certainty." Numbers are precise and predictable. That's cool!
What's even more cool is that he could predict this as the ship appeared to be doing just fine. Everyone was still dancing and eating dinner and having a jolly good time. Even the poor third-class passengers who were locked in steerage trying to catch mice for dinner, were partying. And all the while, it was a "mathematical certainty" that they were going down..
As my recent episode on The 30/3 Rule shows, you can use simple math to understand the mathematical certainties of the world around you. Some of these are fun certainties. Others, you'd really rather not know about.
Today, I'll share 4 ways you can use simple math for profound insight. Math Dude would be proud!
Tip #1: Calculate a Breakeven
When I work with business clients, whether they're entrepreneurs, corporate executives, Boy Scouts, or Girl Scouts, I teach them to calculate a breakeven. Breakeven tells you how many of something you must sell to cover your costs. Simply divide your cost by the money you make selling something.
People tell me I should make a Get-it-Done Guy app. Apps are where it's at. Let's say I want to make $50,000 per year. If I can sell my app for $5 (which is expensive for an app), I need to sell $50,000 divided by $5 or 10,000 copies. That's a lot of copies. But let's pretend I have a diabolical marketing plan that can pull it off.
Now I just need a programmer and designer. I scout around and determine they will charge $20,000 to build an ingenious app. To pay for that, requires an additional $20,000 divided by $5 or 4,000 copies sold. My marketing plan may be diabolical, but it's not diabolical enough to assume I can go from 10,000 units sold to 14,000 units sold. That's a 40% jump, just from hiring two people. Breakeven analysis tells me how much I must boost sales efforts to cover the extra costs.
Next time you hire a new employee, calculate the breakeven for their salary. Then you can say, "To pay for your salary, we need to sell an additional 32,916 razor blades this year." Once they feel guilty enough, ask them to buy you lunch. Everyone wins. Or at least you do.