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. 

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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.

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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.

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Learn More About Women-Owned Small Business Programs

March 8, 2019 by Comerica Bank

Women face more than the gender pay gap when it comes to economic headwinds. There are also specific challenges that women entrepreneurs and women-owned small businesses undergo compared to their peers and the rest of the market, respectively.

Lack of access to financing and bias in contract awarding can negatively impact the success of these organizations. However, the federal government and many other advocacy groups have made boosting support for women-owned small businesses a priority. Tackling the particular pains and pressures of being a female entrepreneur can be as easy as learning more about the women-owned small business programs that are out there to help.

Certification as a women-owned business

There are many programs designed to specifically help women- or minority-owned ventures. For instance, some companies make a specific point to reflect diversity in their supply chains by increasing the footprint of women-owned businesses. However, before organizations can take advantage of such opportunities, they must fulfill one essential prerequisite: becoming certified as a women-owned small business. There are a couple of options for certifying bodies and business designations to brush up on, including:

  • The Women-Owned Small Business (WOSB) designation offered by the U.S. Small Business Administration (SBA).
  • Certification from the Women's Business Enterprise National Council™ (WBENC).
  • Certification from the National Women Business Owners Corporation™ (NWBOC).
  • Designation as an economically disadvantaged women-owned small business (EDWOSB) from the federal government.

Though what qualifies a business for certification differs slightly depending on the options, especially regarding economically disadvantaged status, general criteria include: 

  • U.S.-citizen women directly owning at least 51 percent of the business.
  • Women overseeing day-to-day operations and making long-term decisions.
  • A woman holding the highest possible rank of officer.

Applicant organizations should ready their cases with plenty of other documentation, as the process is known to take time. The reward, however, can be immeasurable, as certified businesses can take advantage of:

SBA WOSB Contracting Program

The SBA maintains a federal contracting program designed to steer contracts toward deserving, certified WOSBs. The contracts typically reserved for the program are from industries where women-owned businesses are underrepresented, and the SBA's leveling of the playing field helps position WOSBs to compete in the federal contracting arena more effectively. Some example industries include forestry, construction, civil engineering, industrial manufacturing and energy. Businesses can be certified directly by the SBA or through the WBENC.

WBENC or NWBOC benefits

When a business is certified by either the WBENC or NWBOC, that enterprise is now entered into the fold and able to access the full range of benefits each organization offers. For instance, small businesses can display the logo of their accrediting body in a storefront or on marketing materials. The WBENC and NWBOC also run conferences, seminars, training sessions, networking events and other opportunities, while engaging with corporate partners with whom their members then have established inroads.

Getting help as a women-owned small business doesn't end with certification. There are other avenues of support and opportunity offered by institutions committed to the success of these firms. Talking to Comerica Bank today can help connect women-owned small businesses with lending assistance and financial advice.

 

 

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

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.

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How to Get Honest Feedback From Your Customers

March 8, 2019 by Comerica Bank

Focus on building healthy relationships

There’s no big secret to it – the better the relationship you have with your customers, the more likely they are to stay loyal to you. One of the most effective ways of building and maintaining good relationships is to obtain useful, honest feedback from your customers.

To achieve this, you need to begin a series of small actions that create a connection with each of your customers and help build relationships over time. This is key to getting truthful feedback when you need it. The feedback may not always be what you want to hear, but it needs to be an ongoing part of your business if you want it to improve and grow.

Your customers deserve the personal touch when it comes to communication. They expect your business to make an effort replying to their requests or questions. Doing so will improve your chances of gaining useful, authentic feedback.

Put yourself in their shoes

The first step is to make yourself view your business as you would if you were one of its customers. In the end, all business owners are customers of other businesses themselves, and if you think about some of those businesses and the experience you have with them, you’ll be able to view your own business objectively.

Go through the steps your customer would take to visit your store or website, select an item, and navigate through the purchase process. If you get frustrated at a certain point, your customers probably will too.

It’s a good idea to get your employees to go through the process as well. Not only do they have the best interests of your business at heart, but it’s a good opportunity for them to make suggestions to you as they may have ideas of their own for improvement that are worth listening to.

Asking the right questions

There are various ways you can elicit feedback from your customers. You might conduct in-store or online questionnaires, use email surveys, place suggestion boxes in your store or on your website, or make use of your social media platforms. Whatever methods you use, the key to getting honest, useful feedback lies in the questions you ask and how you ask them.

Coming up with questions

Your aim is to ask smart, relevant and open-ended questions. After all, you want their opinions rather than pigeonholed responses. Seek feedback about one or two critical issues without asking for an hour or more of their time. It’s important to keep the following in mind:

  • Be clear and precise. For example, “How often do you buy our product?” is vague and will result in worthless information because customers will interpret ‘often’ in different ways. A better way to ask this question would be “In a typical month, how often would you buy from our company?”
  • Use clear, normal language. Nothing puts people off about a survey faster than having to untangle long, complicated questions. So phrase your questions as if you were actually talking to your customers face to face.
  • Avoid words that indicate bias. Rather than asking “What did you dislike about the service you received?”, you’re better to phrase it “Please comment on the service you received.” That way you’re avoiding the word ‘dislike’ as this will automatically make the customer think there’s something wrong.
  • Give them a chance to make suggestions. Your questions should encourage customers to suggest ways you can improve your service.

Keep the questionnaire as brief as possible, one page if you can manage it. People will be more cooperative if the form is brief and relevant. There is no point in getting information that you won’t use.

Collecting feedback

Try out different methods of collecting feedback to see what works best for your business. Once you’ve got the number of responses you need, it’s time to review and take action. Even if the feedback’s more negative than you’d hoped, you still have to take them at face value and act on them. If the responses are negative, try to see the whole exercise as an opportunity to make positive improvements to your customer experience.

It’s also vital to report the findings to your customers. If you have a retail outlet, pin up a copy of the result and explain your next steps based on the survey.

An alternative is to mail a copy of the results to all clients (a good excuse to contact them). The important point is that you are harnessing a powerful force if your customers think they can.

Summary

The main thing you’re looking to avoid is assuming that you already know what your customers think. It’s always possible that plenty of the feedback you’re receiving from people in person isn’t honest. Whether your customers are busy, distracted or simply embarrassed to say what they really think, you’re probably not getting the answers you really need.

Remember: It’s important that you make your customers feel that their feedback is valued, important, and will be acted upon.

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.

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