According to the tax foundation.org, Tax Freedom Day is the first day of the year in which a nation as a whole has earned enough income to fund its annual tax burden. It can be calculated for the entire nation. For example in 2019, Tax Freedom Day for the nation fell on April 16. There can also be separate Tax Freedom Days calculated for each state. For example, in the same year, Tax Freedom Day was March 25 in Alaska and March 30 in Oklahoma, the first and second states to reach the day, whereas it came on May 3 in New York, the last state to reach this day. This means that Americans work between three or five months a year simply to pay off taxes.

It occurs to us that similar figures can be calculated for individual companies to help them understand when they’ve attained the dollars of gross profit required to cover the year’s overhead. We call it Overhead Freedom Day. Remember that every incoming sales dollar will be distributed in only one of three ways: production costs, overhead costs, and profit.

Once you have covered your overhead for the year, all the dollars left over after production will drop directly to your bottom line. You can use some relatively simple projection techniques to find out when you will achieve Overhead Freedom Day in your own company.

To determine your Overhead Freedom Day, follow these simple steps:

  • Identify your overhead
  • Calculate how many dollars it takes to sustain the company for a year
  • Identify your target sales figure for the year
  • Look at your sales to date, then consider your pipeline and estimate your total sales this year
  • Identify your gross margin
  • Determine the average gross margin that you will achieve this year
  • Calculate your “Overhead Freedom Day”:

1. Multiply your projected sales by your gross margin to determine your projected gross profit in dollars.

2. Divide by 365 to determine the gross profit dollars earned per day.

3. Divide your projected overhead by the result to calculate the total number of days required to cover overhead.

4. Divide the above number of days by 30 to determine the month in which you will achieve Overhead Freedom. Or, you can use an online day-number calculator.

Now is a good time to calculate your own Overhead Freedom Day. Have you reached it yet? How long will it take? If it seems too far away, it’s not too late to make adjustments.