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I talk to quite a few small-business owners every week, and from what I’m hearing, many are still struggling in the wake of the recession. While everyone has taken steps to shore up their businesses, I often find there are things they’ve overlooked.

For this reason, I’m devoting this column to some basic and not-so-basic survival strategies you can use right now.

Let’s start by reviewing your financials, something entrepreneurs tend to shy away from. Even if you’re not a numbers person, you can (and should) do these simple exercises. We’ll focus on your expenses, operating income, and ultimately your break-even point — a number essential to your business’s survival.

Four Categories of Expenses

Everyone wants to reduce expenses, but you can’t do that fully until you know exactly what they are. Business expenses fall under four categories:

• Fixed expenses: These remain consistent, regardless of revenue or business activity. These include rent, insurance, utilities, salaried employees, etc. (For our purposes, we aren’t including things like depreciation and amortization — only expenses you pay for with cash.)

• Variable expenses: These fluctuate in proportion to production. They include items such as cost of goods sold, shipping costs, sales commissions and direct hourly labor. When revenue increases, so do variable expenses.

• Step variable expenses: These are expenses that can be treated as “fixed,” but actually change in increments as activity increases or decreases. For example, your current customer service rep’s salary is a fixed expense. As business increases, you may eventually need to hire another one. That new salary is considered a step variable expense.

• Discretionary expenses: These are costs you choose to incur, such as travel, entertainment or trade shows. They are likely to give your business a boost, but aren’t critical to it. When you’re in survival mode, one of the first things you can do is put discretionary expenses on hold.

Breaking Out Your Expenses

Now, categorize all of your expenses as fixed, variable, or discretionary. For this exercise, include step variable expenses with fixed expenses. Don’t overthink it; just do your best.

Then, plug in the actual numbers for each expense for a given accounting period, such as the 2009 calendar year or the past 12 months. That’s all there is to breaking out your expenses.

Determine Net Operating Income

Now, things get interesting. Subtract your total variable expenses from your total sales for that same period. The remainder is your contribution margin.

Your contribution margin is very revealing. It’s the amount of each sales dollar that’s left after variable expenses are paid — revenue minus cost of goods sold, freight out and commissions.

Now, subtract your fixed and discretionary expenses from your contribution margin. The amount that remains is your net operating income for that period — your profit before depreciation, amortization and taxes.

In other words, the formula is: total sales minus variable expenses equals the contribution margin.

Then, contribution margin minus fixed and discretionary expenses equals net operating income.

Conduct a Break-even Analysis

Here’s another way to look at it: Every business should know its break-even point — that is, how much business it must it do to generate the gross-margin dollars needed to cover fixed expenses.

You’ve already calculated your fixed expenses. To determine your break-even point, you’ll need one more number: your gross margin profit percentage.

Here’s how to calculate it:

• Sales minus cost of goods sold equals gross margin dollars.

• Then, gross margin dollars divided by 100 equals gross-margin profit percentage.

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