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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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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Your Startup Business Plan Checklist

April 6, 2019 by Comerica Bank

Do you dream of owning your own successful business? One where you achieve your financial goals, or turn your hobby into your livelihood?

With our comprehensive startup checklist, you’ll find the helpful direction you need to transform your business idea into the reality of becoming a business owner.

Decide on a viable business idea

  • Develop a comprehensive business plan
    Write down what you aim to achieve over your first few years in business. Your business plan will be crucial for showing to your bank, keeping your business on track and remaining focused on achieving your goals. Use our business plan template to get started.
  • Decide on your business structure
    The four main types of business structures in the United States are sole proprietorship, partnership, Limited Liability Corporation and corporation. Find out more about each business structure on the Small Business Adimistration website.
  • Check to see if your business name is available and register it
    Come up with a name that’s unique, effective, descriptive and memorable. It should have an impact on people, relate to your industry and not be easily forgotten. Find out more about safeguarding your business name.
  • Find enough money to start
    Identify your startup costs and carry out a break-even analysis to find out how much money you’ll need to successfully launch your new business.
  • Research lending options
    Take a look at the financing options available for your business. Be sure of how much funding you need during your startup phase and your projected sales. Take a look at our small business lending options
  • Settle on the best supplier for your business
    Use industry networks and your business contacts to find a reliable supplier. Organize contracts for any raw materials or products you need to get underway.
  • Protect your intellectual property
    Look at the steps you’ll have to take to protect any patents, trademarks, copyrights or trade secrets. Visit the United States Patent and Trademark Office for more information.

Check for compliance

  • Apply for an employer identification number (EIN)
    In the U.S., your employer identification number primarily serves tax administration purposes. You can find how to apply for one on the Internal Revenue Service website.
  • Find out if you need any licenses or permits
    You can find out what state licenses or permits your business might need through the SBA website. For information on federal licenses and permits, also see the SBA site.
  • Set up a reliable accounting system
    Being able to view your transactions and cash flow situation in real time is a huge advantage, so think about using a cloud accounting system that you, your staff and your accountant can maintain together.
  • Look into options for business insurance
    It’s important that your business is covered by the right insurance. Determine which types of insurance your business will need most, and weigh up the risks versus the costs of all potential coverage.
  • Talk to your lawyer and accountant
    Your accountant and lawyer will go over your business plan with you to ensure it’s all in order before you present it to your bank.

Undertake market research

  • Find out the size of your potential market
    The best way you can learn how large your target market could be (and your likely share of it) is by conducting some research. Complete our online training about researching your market.
  • Establish your competitive advantage
    Your point of difference, unique selling point or competitive advantage will be a crucial factor in the success of your business. Your potential customers want to know why they should shop with your business rather than your competitors.
  • Ensure it’s simple to make and receive payments
    Will you be able to offer multiple payment options that include the latest technology? Ease of payment will entice customers and help you maintain a healthy cash flow.
  • Explore pricing options
    Can the prices you’re going to charge compete with your competition? If you’re charging more than your competitors, your marketing strategy needs to tell customers why they’re paying more. View our video on how to set a price.

Create a marketing plan

  • Analyze your customers’ buying behavior
    Speak directly to your customers to find out their needs and buying behaviors. Find out how often they’re likely to purchase from your business.
  • Construct profiles of your target customers
    Design profiles of your main types of customers. Understand their purchasing habits so you can sell more. Learn when, what, why, where and how your customers prefer to buy.
  • Complete social media surveys
    Survey your customers online and use the results to make improvements to your business and its products or services.
  • Create an online presence
    Social media can help you drive traffic to your website, build relationships with your target customers and enhance your credibility. Start working on building a presence online. Take our quiz about building an online strategy
  • Attend trade shows and industry events
    Boost your brand awareness, check out your competitors and utilize your networking skills to get your offerings to your target market at events and trade shows.
  • Build word-of-mouth advertising
    Encourage your regular customers to refer their friends, family and work colleagues to your business. Offer them small loyalty rewards for their efforts. Take our business quiz on cost-effective advertising
  • Develop and grow your advertising campaign
    Plan an advertising campaign that fits within your budget. Will online promotions, email marketing, signage or print or radio advertising be most effective for your target group? Complete our online training to help build your own marketing plan.
  • Improve your customer retention
    Remind your customers when it might be time to purchase from your business again, by using your social media platforms, a loyalty program or an email automation system.

Establish who your competitors are

  • Examine your competitors
    Take a good look at what your competitors do well and what they lag behind in. Then, work on an advertising angle that might convince their customers to switch to your business. See our competitor analysis video for more information.
  • Carry out competitor SWOT analyses
    Compiling SWOT analyses of your main competitors will help your business maximize its strengths, reduce its weaknesses, take advantage of its opportunities and avoid threats.
  • Establish your business’s point of difference
    Decide how you want to position your brand, determine which customers it will be able to serve best and look at how it will fit into the competitive landscape. Learn to market your point of difference.
  • Decide how you’ll price in relation to your competitors
    Do you plan to compete on price, or on the benefits of your products or services? How can you counter the actions of established competitors when you enter the market? Read more about getting your price right.

Be sure you can make a profit

  • Estimate your overheads and margins
    The regular expenses your business will have (regardless of how much you produce) are your overheads. Calculate them, and then determine some sales goals to work out your profit margin.
  • Complete a break-even analysis
  • It’s important to have an accurate estimate of how many items (or hours of service) you’ll need to sell each week to cover your costs and begin to make a profit. Learn how to calculate your break-even point.
  • Carry out a cash flow forecast
    You’ll want to predict when you might have too much or too little cash, so generate a cash flow forecast to help identify sales and expense variations month by month. Work out your cash flow forecast.
  • Conduct a sales forecast
    When starting your business look at trends in your industry, check out past statistics of market demand and watch your competitors to estimate your own sales forecast. Find out more about forecasting sales.
  • Check your capacity and capability
    Make sure you have the right equipment, staff and capability to do the job. Do you have the right manufacturing tools, or can you call on the right knowledge and expertise?

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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5 Key Things to Look for When Evaluating a Potential Banking Partner

November 7, 2018 by Comerica Bank

Choosing the right banking partner for business services is about more than just interest rates and lending options. Today's businesses need the financial flexibility to keep up in a global, highly digital economy that moves quickly. Organizations need banks that offer the support, services and flexibility required to drive and sustain growth. This often means building trust through a comprehensive service model blending customer service and traditional financial services.
Selecting the best bank for your needs requires a careful analysis of where you are as a business and the specific service offerings available. Five key issues you should explore include:

1. Online banking options

Organizations can't afford to sacrifice convenience and accessibility with their banking partners. As consumers move at the speed enabled by cloud, web and mobile apps, organizations must also manage their back-office systems with speed and efficiency. If you can only engage with your bank in person, you could find your business falling behind peers who can interact with their banks in more convenient ways.
In many cases, how you empower your employees to operate will trickle down to how those workers serve your customers. If your leaders spend time making unnecessary trips to the bank, then they'll be left with less time to put toward customer-focused initiatives.

2. Specialized advisory services

Most banks offer some basic advice on the best uses of different account and loan types, but the approach often focuses on providing enough details to push a customer to a decision. Businesses face varied demands depending on the specifics of their industry and nuances of the market at a given time. Look for a bank that will advise you on services and lending options that will foster growth. In particular, focus on identifying if any banks you are considering offer advisors with specialized knowledge for your industry to go along with general banking expertise.

3. Needs-based services

Product-focused business banking can prove problematic as companies try to make sense of what service offering makes the most sense for them without fully understanding how banking, insurance, wealth management and legal issues come together to impact their situation. Banks that offer needs-based services can help organizations understand the holistic circumstances around their financial services situation and make the best decisions possible. Ultimately, businesses should look for a bank that sets itself apart because it is ultimately standing out based on relationships and advice, not products and interest rates.

4. Service breadth

Advisory options for corporate banking customers are invaluable, but only if they are accompanied by flexible service models that give businesses a wide range of solutions from which to choose. Don't neglect the full breadth of services available from a banking partner, as businesses today are increasingly pulled in many directions at once. You may need to bolster growth in one part of your organization while becoming conservative in your investments elsewhere. Banks that can blend investment, lending and other corporate-focused services can be invaluable when you face such situations.

5. Global reach

Digital technologies are breaking down traditional boundaries between customers and businesses, including geographic issues. With customers able to learn about and interact with brands in new, more intuitive ways, and with import and export opportunities ever-expanding, organizations increasingly must be prepared to operate across national borders, managing customer interactions, employment, foreign currency risks and supply chain issues across the globe. Banks with dedicated international services can make it easier to transition to a global business model, even in small ways, as your company grows.

Get the most from business banking

Businesses need more than basic banking and lending. As the Leading Bank for Business1, Comerica Bank sets the standard for modern, sophisticated banking services that can empower organizations to sustain growth in a rapidly changing marketplace.

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.

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.

 

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What to Do When a Standard Business Loan Doesn't Seem to Fit

October 30, 2018 by Comerica Bank

The American business sector specializes in a broad array of products and services, providing many scenarios where financing may be necessary. Proper financing provides many tools to keep your business growing, whether it be for inventory investment, startup purposes, purchasing real estate for expansion, or the leasing or buying of equipment.

Since loan types serve specific purposes, what do you do when your lender doesn't have the product that matches your business needs? Lending services ought to be made to fit you, not the other way around. From lines of credit to commercial real estate, working capital and more, these options may seem fine at first thought, but what looks right on paper may be all wrong in practice. This is why the relationship you form with your lender, who's tasked with personalized customization, is critically important.

Before you go about applying for a loan, it pays to understand the loan options available to you. This way, you avoid choosing a loan that doesn't work or missing an opportunity to secure one that is more suitable. Here is a brief description of a few such solutions, along with some of the pros and cons to be aware of before you decide.

Equipment financing

What do you do when you need more equipment, have to repair broken parts or upgrade tools that are badly in need of rejuvenation? Tapping into what funds you have available can throw a wrench into your normal operating business processes. Equipment financing serves as a smart solution for keeping your money where it is so it can be used for other purposes. Plus, approval is quick, allowing you to address time-sensitive projects when they arise.

Depending on how frequently you go through your equipment, it may have depreciated significantly by the time the loan is repaid. That's something to be mindful of before obtaining this type of financing.

Working capital

A company's long-term well-being often hinges on its short-term operational needs. When cash flow is low, perhaps due to the nature of the sales cycle - like for seasonal businesses - working capital loans improve liquidity so services can continue, vendors are paid and capital expenditures are addressed.

There are some caveats to working capital loans that may be drawbacks. A low business credit score can make approval more difficult, and repayment windows tend to be shorter than with other loan products.

Commercial real estate loans

Commercial real estate loans allow for a more diversified financial portfolio, among other potential benefits. Financial services such as these are ideal for building or implementing renovations. You do need to be mindful of some of the potential obstacles to obtaining commercial mortgages, which can include a sizable deposit and the interest rate environment, which is subject to fluctuation if you select a variable rate.

Running a business is tough enough - an endeavor filled with all types of uncertainty. You deserve a loan that's aligned with your goals and eliminates the guesswork. That's what sets Comerica Bank apart. Whether you're expanding your business, seeking an injection of working capital or financing a professional practice, the lending services from Comerica Bank work with you in mind, the way it ought to be.

There's a reason why we're the Leading Bank for Business1. At Comerica Bank, our business is business.

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.
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.

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