Finding Your Business's Break-even Point

May 15, 2019 by Comerica Bank

Before you start a business - and perhaps leave a job to do so - make an effort to determine if your idea will be worth the risk.

If you’re confident there’s a genuine demand for your potential product or service, at the price you seek to elicit, the next step is to work out how much you need to sell each month to make a profit.

Will your business venture be worth it?

It’s unlikely your business will be profitable from day one. Sales are likely to be slow at first, but you’ll be hoping they gain momentum.

Meanwhile, you have certain fixed costs (overhead) that you have to pay each month to keep your operation running. These include:

  • Rent or mortgage payments.
  • Utilities.
  • Interest on debt.
  • Communication costs.

You'll also have other expenses that will vary with sales levels. These variable costs include supplies to make a product or to stock shelves (if you sell more, you’ll need more), freight, commissions and extra labor to produce your goods.

When sales equal costs

All of this means that a typical business in its early stages will run at a loss until the point at which sales match costs. This is known as the break-even point. If sales continue to climb after that, you'll start making a profit each month.

Below are two quick and ready ways to test the feasibility of your business. They presume you know both the fixed costs of running your business and the variable costs of producing a product or selling a service.

How a manufacturing business breaks even

Here’s an example of a business making garden benches out of wood.

First, work out the gross profit on each bench - the difference between the product's sale price and its variable production costs.

The cost of each bench

Your research shows a realistic market price for each bench is: $120

Labor cost ($40) and materials ($25) for each chair come to: $65

The difference between $120 and $65 is your gross profit: $55

What you want from your business

To justify the risk, you want a salary each year of: $80,000

The overhead costs of running your business are: $20,000

Therefore, the annual gross profit you need on sales is: $100,000

How many sales do you need?

To find out how many benches you have to sell each year to meet your salary goal, divide the required $100,000 gross profit by the gross profit per bench of $55. The result shows you need to sell 1,818 benches a year.

How does that average per week? If you decide you want at least a four-week break every year, divide 1,818 by 48 weeks, which makes 38 benches a week your break-even sales target. Do you think you can meet that?

Remember, this is a break-even point only. It will pay your required salary, but there’s no extra profit margin in there to grow your business.

Try your own figures to determine what your company's break-even will be.

How service businesses break even

In a service business, you’re selling time, so you take a slightly different angle. Let’s presume the goals remain similar and you’re working alone, except for one part-time employee who handles office tasks so you can spend more time with customers. This salary adds $20,000 to your overhead.

What you want from your business

To justify the risk, you want a salary each year of: $80,000

The overhead costs of running your business are: $40,000

Therefore, you need to bill out: $120,000

What time do you have available

You decide to work 5 days a week for 48 weeks, or 240 days a year. Subtract another 15 days for sickness and holidays, leaving a total of 225 working days.

You plan to put in at least 8 hours a day, but allow 3 hours for travelling and work such as marketing and quotations. This leaves 5 billable hours a day.

Your hourly charge-out rate

Now you’re ready to calculate your charge-out rate.

Billable hours per year = 5 hours per day x 225 working days – or 1,125 billable hours.

Divide your goal of $120,000 by 1,125 billable hours, and your minimum charge-out rate per hour must be $107. Again, this is just the break-even figure to cover costs and salary, with no profit involved.

Some questions to ask include:

  • How does an hourly rate of $107 compare with the industry average? Is it competitive?
  • Can you feasibly bill out $535 a day (107 x 5 billable hours) or $2,675 each five-day workweek?

Try your own figures to see what hourly rate you come up with and decide if it's both competitive and feasible. Will you be able to meet that goal of 25 billable hours each week?

Use our break-even template to calculate your business’s break-even point.

Use a cash-flow forecast

Use a cash-flow forecast to check your break-even calculations. This will force you to think more carefully about both variable and fixed costs. Get advice from an accountant if necessary, because a portion of some costs, such as extra power use, may belong in variable costs of production rather than fixed expenditures.

Completing the sales side of your cash-flow forecast will also help you identify how long it might take for your venture to break even.

For example, in the manufacturing example above, the business needs to sell 1,818 garden benches over the course of the year. However, demand would likely be slow in the winter months before picking up again in the spring, and the business’s running costs must still be paid. The bottom-line figure for each month will show you both when your business is likely to break even and how much funding you’ll need to keep your business going until then.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such. 

Read More

Effective Time Management

May 3, 2019 by Comerica Bank

As small-business professionals, your time is one of your most valuable assets. It’s essential that you use it effectively. Establishing goals and deadlines, prioritizing work and delegating tasks are some ways you can achieve this.

Track your time

Completing tasks within a specific time frame is a huge test for small-business owners. Important tasks can get overlooked with too much time spent doing odd jobs. Without tracking your time, you’ll have no way of identifying time wasting activities or tasks that could be delegated.

To work more efficiently, you need to track your time. Doing so can lead to increased productivity, as businesses will better understand where time is well-spent and where it's being wasted.

Begin by detailing what tasks you do each day and the time each task takes. This can be in the form of rough notes, although there are some free programs and apps available online to help you out.

Time-tracking programs record time spent working on each activity. They’re useful for small-business owners to:

  • Monitor Internet usage.
  • Allocate time for projects.
  • Record time sheets for employee wages.
  • Graph the effort spent on each task.

Toggl™, ClickTime™ and Replicon™  are just a few of the better time-tracking programs available online.

Set priorities

Identify tasks that will best assist your business to work toward maximum profitability. After recognizing the tasks that need to be done, make them a priority by completing them before any others.

Try not to waste time achieving perfection. It’s more important to just get each task done.

Establish deadlines

Deadlines are critical for completing all activities in a timely manner. Ensure you:

  • Set realistic deadlines for all your activities.
  • Schedule interim deadlines for long-term projects.
  • Allow time for contingencies, especially on longer tasks.
  • Decide whether your deadlines are flexible or fixed. If certain activities have fixed deadlines, don’t permit them to take longer than they should.

Reduce time wasting

Small-business owners deal with similar kinds of time-wasting activities, such as:

  • Changing between tasks.
  • Answering emails.
  • Being distracted by phone calls.
  • Excessively long meetings.

As a result, some small- business owners experience reduced productivity. This makes it more difficult to finish their to-do lists.

Make note of any time-wasting activities at your workplace and meet with staff to discuss and brainstorm solutions. Consider the following:

  • Scheduling times to check emails so they don’t distract you from your current task.
  • Assigning phone responsibilities to certain employees.
  • Ensuring a task is completed before moving on to the next one.

Employees work more efficiently when they know something needs to be done. Have clear guidelines and instructions for each staff member so they know exactly what needs to be completed and when.

Delegate responsibility effectively

As a small-business owner, you don’t have to undertake all the major tasks and responsibilities yourself. By effectively delegating tasks to your employees, you’ll free up valuable time to focus on growing your business. This can be a great way to get more organized and move your company forward.

List some tasks you could delegate to reliable employees whose skills are suited to particular activities. Many employees want to develop new skills or have added responsibility in their jobs. Learn to rely on them, and to trust them, to complete their designated tasks.

Can you delegate some of your urgent yet least important activities to someone else within your business? Doing so will allow you to give the highest priority to activities that are both urgent and important.

Improve work processes

Poor work processes can contribute to unhappy customers and stressed employees, as well as missed deadlines and increased costs through inefficiency. This is why it’s crucial to improve processes when they aren’t working well.

Get organized

Invest some time now in developing well-organized systems for your business. The savings will be apparent in the long term.

Most small businesses have tasks that need to be done daily. They’ll be easier to manage if you have established processes in place. Some steps you can take include:

  • Clarifying your processes during team meetings.
  • Keeping yourself focused with a list of tasks you need to accomplish and their deadlines.
  • Ranking tasks by priority to ensure the most important jobs get done first.
  • Staying motivated by ticking items off your to-do list as you complete them.

Identify redundant tasks

Work processes can be improved by recognizing any outdated or redundant tasks within your business environment. One example may be when a bottleneck occurs. You must assess the situation and determine if new technology could improve the situation.

Work to your personal productive times

Whether you’re a morning person or an afternoon person, it makes sense to undertake the big projects or arrange the most important meetings for the time of day you work best. Try scheduling more routine activities for your less productive times of day.

Make meetings productive

Endeavor to avoid meetings becoming social gatherings. Run them to a tight timetable so productive time isn’t wasted.

Start with a plan to set strict time frames on meeting agendas. Request only those employees who need to attend each specific meeting. A focused discussion is what you’re trying to achieve and establishing these parameters will support that.

Be well prepared to ask good questions, which elicit quality feedback from staff, to get the most out of meetings. Good questions will cause people to think about their responses and not simply reply with ‘yes’ or ‘no.’

Set realistic goals for improvement

Setting specific goals that are realistic will keep motivation high while encouraging employees to go that extra mile.

Bigger goals should be broken down into attainable sums with set milestones to help make them achievable. For example, when expanding to another location, you may look at acquiring staff as a first milestone, followed by finding the right location and eventually setting up your new premises.

Goal-setting gives you both direction and a destination. Assess which tasks will help you achieve your goals then allocate your time accordingly. It’s imperative to focus on priorities so you spend most of your time on activities that help you achieve your goals.

Business goals are vital to your success as they let you take control of your business’s direction, instead of allowing events to control it.

Proper time management is essential for running a business smoothly. Applying the time management guidelines above will help your business operate more efficiently.

Next Steps

  • List any time wasting activities and any outdated or redundant tasks.
  • Meet with staff to discuss these activities and to consider ways of increasing efficiency.
  • Look into using a time-tracking program. 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

Read More

Safeguarding Your Business Name

May 3, 2019 by Comerica Bank

How to protect your business name

It distinguishes your brand, carries your reputation, and connects with your customers. It’s your business name, and it’s one of the most important things you’ll need to protect.

There are a few steps you can take to register and safeguard your business name, so that a potential competitor can’t start a business with an identical or similar name. After all, you’ll want to avoid your reputation suffering, confusing your customers and losing business.

Choosing a suitable name

There are a number of factors you should consider when choosing an appropriate business name, including:

  • Branding: How your name will come across on a logo, social media or your website.
  • Uniqueness: Choosing an original name is essential.
  • Meaning: Does your name reflect your business philosophy and appeal to your target market? Does it have any unwanted undertones?

You’ll need a business name that has a domain name available and can be registered and protected into the foreseeable future.

Registering a DBA (trade) name

If you’re a sole proprietor or you’re starting a partnership under a name that isn’t your real name, you’ll need to register for a ‘doing business as’ (DBA) trade name. It’s also sometimes referred to as an assumed or fictitious name.

Your DBA name will let your state government know that you’re doing business under a name different to your personal name or the legal name of your business.

How to register a DBA name

You can register your ‘doing business as’ name with your state government or county clerk’s office. Be aware though that not all states require new businesses to register DBA names. Select your state on the SBA’s register with state agencies web page to find out.

As an example, if Tony Johnson sets up a landscaping business in Texas and wants to name it ‘Johnson’s Land Scapes’, he’ll need to register it as a DBA name in Texas.

Using your own personal name

You can use your own name for your business. And if you choose to do so, you can skip the process of registering a DBA name.

Starting a company

If you’re setting up a limited liability company and want to trade under another name that isn’t your company name, you’ll also have to register. For example, your business might be registered as ‘The Mushroom Farm 2016 Pty’ but you plan to promote and trade as ‘Mushroom World.’

Applying for trademark protection

You’ll definitely want to protect your business name from being copied, especially before you begin to build up a loyal customer base. A trademark will protect your logo and the brand name used on your products or services.

To give your business name legal protection, apply for a federally registered trademark by meeting two conditions. Your business name:

  • Has to be distinctive.
  • Can’t create confusion with other registered trademarks.

Trademarks can be registered at state and federal level. To register your trademark at federal level, visit the United States Patent and Trademark Office (USPTO) website. You can file for a trademark for less than $300.

Make sure you also use the USPTO’s trademark search tool to find out if your proposed name, or something similar, already exists.

Speak to an intellectual property lawyer

It can be difficult to detect whether your chosen trademark might be clashing with another business’s trademark, and the penalties for making this mistake can be heavy. For these reasons, think about talking to an experienced intellectual property (IP) lawyer to ensure you’re covering all the bases.

Safeguarding your online business name

Even if you don’t intend to run a website from day one, it’s important to register for a domain name to make sure your business name is available as an Internet address.

It’s a smart move to brainstorm a domain name that’s:

  • Reflective of what your business does.
  • Keyword heavy.
  • Unique and available.

Be sure to conduct your own checks over the Internet to be certain no one else is already using your preferred address. Test your proposed domain name in the WHOIS database to see if it’s available.

Consider registering multiple domain names (for example, if your business name is Fresh Veg, you might register ‘freshveg.com’, ‘freshveg.info’ and ‘freshveg.us’.

Learn more about how to register a domain name through the SBA’s guide.

Next steps


This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

Read More

Equipment Leasing vs. Buying – The Pros and Cons

April 23, 2019 by Comerica Bank

Is borrowing money essential?

Whether you need to purchase a vehicle, computer equipment, or a bigger warehouse to expand your business or to operate more effectively, take the time to consider how each purchase might impact your operating capital.

Think about whether leasing is the way forward. If you decide to lease an asset, you won’t have to hand over a large chunk of your business’s cash. That cash could maintain your reserves, be used to invest in more stock or to develop a new product or service.

Cash-flow impact

Sit down and calculate the potential impact to your business’s cash flow if you were to:

  • Purchase each asset outright in cash.
  • Lease the assets you need.
  • Take out a small business loan.

By making loan repayments over time, you’ll be able to pay off a larger capital purchase that may have been impossible to afford with cash.

Paying loan installments can also make it easier to afford the assets your business needs without stripping it of its available funds.

Choosing to buy new or secondhand

It always pays to do your due diligence before you sign a purchase agreement for any new business assets. For example, the cost of machinery and equipment can be enormous, so it's worthwhile comparing prices of different brands, manufacturers and suppliers.

If you know that the quality of an asset will play an integral role in your overall business success, it’s probably a wise idea to purchase it brand new. Just keep in mind that you might not always be able to claim the entire amount paid as a business expense – the values of some assets depreciate over several years.

Buying secondhand offers a way to reduce your business expenses. Take the time to shop around to see whether you can locate a used item in good condition that will be reliable.

Deciding to lease or buy

When you lease an asset, you’re simply renting it for a set period of time. The leasing company retains ownership of the asset while your business has the exclusive use of it during the term of the lease.

A lease will typically run for anything between 24 and 60 months. Once an agreement is entered into, both parties are obligated to see out the term of the lease.

Throughout the course of the lease agreement, you’ll pay the lender regular installment payments for the right to use that asset. For accounting and bookkeeping purposes, some leases can be classified in the same way as an asset purchase and can be capitalized on your balance sheet.

However, purchasing your own asset can be a cheaper option in the long run. For example, if you lease a $200,000 piece of machinery on a regular basis over a long period of time, you may find that you've spent more than the purchase price.

Important questions to consider

Before deciding whether to buy or lease, it's prudent to take a few important factors into account, such as:

  • How long will you need the asset for? Is it for a short-term project?
  • Is it cost effective? Will the extra business you make cover the expenses of leasing or purchasing?
  • Will the asset become outdated in the near future? For example, signing a five year lease on a computer that will become obsolete in three years doesn't make much sense.
  • What are your current financial priorities? Are there other purchases that should be made first?

Upgrades and maintenance costs

In cases where technology is changing rapidly, you might prefer to lease the asset your business needs instead of buying it. There are also options where the lease agreement can include upgrading the asset to a newer model once the agreement expires.

Likewise, some lease agreements may also include maintenance and servicing costs. By leasing assets, you could avoid paying any upkeep costs associated with them, saving your business money over the long term.

It's important to look closely at any lease agreement before you sign it. You may find that some agreements:

  • Give you the opportunity to purchase the asset at a reduced cost when the lease expires.
  • Allow you to exchange the asset and upgrade to a newer model when the lease expires – as long as you enter into a new agreement at the same time.

Always be sure that you understand the terms of an agreement before you sign it. It's also smart to run a cost comparison and a cash flow analysis between leasing an asset and buying one with funds from a small business loan.

Ways to fund your asset purchase

There are always different options available for funding your business's asset purchases, including:

  • Outlaying cash or capital you have within your business.
  • Using a small business loan.
  • Employing a revolving line of credit.
  • Entering into a lease agreement to help fund the acquisition.

Summary

If you decide to buy, always check with your accountant about any planned business asset purchases. Discuss the potential impact the purchase may have on your cash flow and ask what alternative options might be available.

You may even be eligible to apply for a Small Business Administration (SBA) loan to help fund the assets your business needs.

Next steps

  • Sit down with your accountant to discuss the cash flow implications of purchasing new or secondhand business assets.
  • Talk to us about our Equipment Leasing finance solutions.


This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

Read More

Creating a Cash Flow Budget

April 17, 2019 by Comerica Bank

While most companies are focused on generating revenue, and rightfully so, it's important to remember that money doesn't only flow into a business, but out. Profits are just one part of the equation, as businesses have monthly expenses and debt obligations they must meet. This means owners have to pay strict attention to their reserves to ensure they always have enough cash on hand. This is called cash flow budgeting, and it's an important process for any business.

How to create a cash flow budget

Cash flow budgeting is the practice of tracking all cash inflows and outflows. Inflows are your cash receipts: any accounts receivable expected within a certain time period, immediate payments made to a business or income from other services. Outflows refer to the fixed and variable costs that operations incur, including electricity and gas payments, insurance premiums, building rent, equipment fees and employee wages. Creating a cash flow budget is a matter of adding up your inflows and subtracting your outflows. What you're left with is the remaining cash balance you'll have on hand, or cash flow. If it's a positive number, great; if negative, there are issues.

Creating a cash flow budget for any given month is as easy as:

  • Using a basic spreadsheet application or software, like those available from Microsoft®️ or Google®️.

  • Tally up what you expect to receive from accounts payable, recurring revenue and carry-over surpluses.

  • Add together your expenses; estimate your variable expenses to the best you can, even overestimate slightly to leave wiggle room. 

What's left is your cash reserve, a sum from which you can draw for ad hoc costs, reinvestment in your business and other reasons. A cash flow statement is the document itself depicting your inflows and outflows. It's required for publicly traded companies to file such statements with regulatory authorities. While small businesses may not be required to provide statements, there are benefits to keeping records. For one, visualizing cash flow can help you to better manage it; also, potential investors will usually demand that level of insight into operations before extending financing.

Cash flow forecasting

The reason a cash flow budget is so critical is that profitability on paper doesn't always translate to cash on hand. For instance, if your clients typically pay a month or two after services were rendered (which is common), an apparent windfall from a large project may actually be leaving you in a lurch in the meantime when expected profits don't make up for bare-thin cash flow margins. Sometimes you might still be in a good place, but an emergency expense or natural disaster wrecks everything.

For these reasons, it's essential to use cash flow forecasting. This process is basically the same as crafting a short-term cash flow budget, but with cash flow forecasting you're looking ahead at months, quarters or years to come. 

Projecting cash flow variables ahead of time can help businesses better track and allocate assets, as well as protect their solvency and ability to meet obligations. For instance, adjusting cash flow expectations to account for upcoming seasonal changes could prevent a harsh winter and high energy costs from creating balance sheet problems. It's also a good idea to construct forecasts for when large debts or loans come to bear. If unexpectedly slow revenue or late payments should affect cash flow, the ability to make those debt payments could be threatened.

All told, cash flow budgeting is a must for businesses. It provides valuable insight into operations and financial management. Yet it can be a complex process with all the different factors that must be considered. If interested in improving your cash flow management, talk to Comerica Bank today about services and products that can assist.

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.

Read More