Wouldn’t it be great if you knew exactly when your business venture is going to break even?
I would love to tell you the number of months it would take you to reach profitability after opening your business. But I’m no soothsayer; this is practical. The answer is easy, yet unknown. A lot of people fall out before they find out. And that’s why the life of a business owner isn’t for everyone.
Starting a small business is a huge risk, a leap into the unknown. It’s a risk that all successful people take; the most difficult part is to start it.
So when do I break even?
Although I get this question in my mail over and over from new and intending startup owners, I always appreciate each one. This is because this question is an indicator that such an individual has his head in the right place. The question redirects your focus to what’s important.
Why is this question important?
Study the ranges of financial results of a group of new small businesses and you will always find a wide disparity.
Some of these reports are collected annually. Income statements are collected; sales, costs and bottom lines are compared. It’s important for you to know the metrics of business like yours.
The key to being in a strong position to break even is setting a target and working towards hitting it. Good business owners must understand their numbers and must be able to manipulate the business in order to navigate challenges.
Science and Art
One of the things I do as a media strategist is to advice artistes on how to brand their work. I usually begin by telling them that music production is both science and art. Let me break it down further.
The “science” part:
It involves setting the right goals, getting good equipment for recording and fixing a proper cover art. The producer has to make sure the track is not too long, or too short. It has to be mastered to sieve out grain and distortion.
The science is easy to teach, since the expected specs are obtainable industry standards.
The “art” side:
I usually advice on the style of music to be produced. The lyrics have to be interesting enough to capture a theme for a video. The tempo and texture of the artistes’ voice should match his persona. The appearance and vibe should be consistent with the lyrics. I often ask artistes to study the current trends and try creating music for the near future.
Now just like what I explained above, art and science is also greatly involved in running a profitable business.
The break-even Formula
For a business, the science of it gives us the standard benchmark. It’s what we need to do for our business to grow from loss into profitability.
This simple equation I’m about to give will let you know if your business has paid back the money you invested in it. The intersection when it goes from losing money to gaining money is called the “break-even point”.
Break Even = Fixed Costs / (100% – Variable Costs %)
It is normally calculated for a period of time. Say, first 6 months or first year. To calculate this for your business, you need to know what your fixed costs and variable costs are.
Fixed costs are your business’ constant expenses. You have to pay fixed costs regardless of the volume of your production. Usually, rent is the biggest and most prevailing fixed cost for local retail businesses. Other fixed costs are utility bills, professional services, insurance and property taxes.
Variable costs are expenses you accrue when you increase production. A bakery for example gets variable cost from purchasing all the ingredients and effort that go into making bread and other pastries.
Once you are comfortable with this simple formula, you can proceed to calculate an adjusted break-even point to find whether your sales are now paying you, paying your business debts and covering your running costs.
Here is the formula, add your debt and desired returns to your fixed costs. Then you divide.
Break-even Sales = (Fixed Costs + Debt payments + Desired owner returns) / 100% – Variable Costs %
The Art of Growing Sales and Building Trust
How long will it take for my business sales to go up? How long will it take to peak on a chart? Here’s where the art is required. It’s all about building networks and relationships. Customers will buy from businesses that they know, trust and like. You can call me a Duct Tape Marketing enthusiast.
Here are three categories of people you should focus your relationship building efforts at:
1. Your local community
For new small businesses in retail, you want to start by spreading word within the community and getting to meet your neighbors (who are potential customers). It’s important to listen deeply to needs; you want to learn what’s important to them. This will help you figure out a way to make the neighborhood even better.
At this stage you need a good first impression. Trust is the key and a few loyal repeat customers are a good sign.
2. The business’ employees
As a business owner, you will want to do it all by yourself, but you cannot. The people who work for you are the face of your business. They are the ones that customers see and talk to. You must communicate with them effectively to transfer your business idea unto them.
Your employees are supposed to be replicas of you. Thus the way you treat them is the way they will treat your customers. An effective workforce is instrumental to your business growth. They need to be able to approach issues the way you would.
3. With the customers
To increase sales, you have to make it easy for people to shop at your place. Your customers need to develop a habit of buying things from you. You need repeat customers. We are all creatures of habit after all. It’s just like a case of men and their barbing salons; every man has a particular barber he goes to. It won’t even matter if he lives 5 miles away. Trust!
The experience of the shoppers is vital. What do they come looking for? Are they satisfied after buying? How can you make them more comfortable?
They need to know that you are capable of meeting their needs on every visit. Once you have repeat customers, continue to impress them with your products and service. They will eventually become evangelists for your business. Satisfied customers hardly keep to themselves. This will lead to organic referrals as they tell others.
When you’ve built a solid foundation, you’ll hit the break-even point without even knowing.
Adoga Godwin is an entertainment business consultant with a keen interest in growing small Business. He has worked as a planner with start-up labels and media distribution outfits since 2015. He writes at HipHopHead