Monthly Archives: May 2016

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Understanding Break-Even Financial Analysis

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Most business owners are familiar with the big three financial control documents: the Income (Profit & Loss) Statement; Cash-Flow Statement (or projection, when used for budget planning); and Balance Sheet. Those three statements are compiled monthly, quarterly and annually. They give useful insight into the fiscal health of the company. The smart business owner consults these statements each month, teases out the story that is revealed and makes decisions accordingly.

A fourth financial document, the Break-Even Analysis, provides forecasting information. The Break-Even is used when a new product or service will be introduced, or when a capital improvement or other upgrade is scheduled to be made.  The Break-Even indicates the amount of sales revenue the product or service must generate to cover the roll-out costs associated with its introduction or acquisition and therefore, positioned to become a decision that pays off.  A Break-Even is also generated when a new business venture is launched. The Break-Even allows the business leader to predict how long losses must be sustained and how to anticipate cash-flow comditions and management in response.

Break-Even is achieved when revenues = expenses; the business is neither making nor losing money. Business expenses are of two types, Fixed and Variable. Fixed Costs are the standard monthly operating costs and they are not impacted by sales revenue generated.  Office space rent, insurance, utilities and payroll are Fixed Costs.

Variable Costs are largely tied to sales: product acquisition or manufacturing costs, inventory purchases, the cost of materials used to manufacture the products sold and all aspects of marketing and selling costs.  As sales increase, Variable Costs increase proportionately, because more product must be purchased or manufactured to be available for sale.  Total Expenses = Fixed + Variable Costs, as recorded on the Income Statement.

When calculating expenses, it is standard to determine the relationship of Variable Costs to sales revenues.  The Variable Cost amount is divided by the number of product units sold,  yielding the Variable Cost per Unit.  In other words,  Variable Costs = units sold  X  variable cost per unit.  For the purpose of calculating Break-Even,  Total Expenses = Fixed Costs + Variable Costs (expressed as units sold  X  variable cost per unit). As always, sales revenues = unit price  X  number of units sold.

The Break-Even Point is reached when

Price  X  Units Sold = (Units  Sold  X  Variable Cost/Unit) + Fixed Costs

The difference between selling price per unit and the variable cost per unit sold reveals the amount that can be applied to Fixed Costs each time a unit is sold.  Think of it this way: if monthly Fixed Costs are $2000 and the average price of your product units sold is $2, with an average Variable Cost of $1 each,  when you sell a unit, you earn $1 to apply to Fixed Costs. With monthly Fixed Costs of $2000, Break-Even is reached when the business sells 2000 units per month.

Knowing how many units must be sold each month to achieve Break-Even is essential for effective financial management of the venture.  One can also calculate Break-Even in terms of dollars that must be generated each month.  In this example, Break-Even Revenue is achieved at $4000 in monthly sales, since the sales price is $2/unit and 2000 units must be sold each month to cover expenses.

A basic knowledge of the process of business financial calculations and the ability to interpret the data generated are must-have skills for all business owners and Freelance consultants. While it is true that one’s bookkeeper or accountant will perform the Break-Even on Quickbooks by plugging in numbers derived from the Income Statement,  it is always in your best interest to understand how the calculations are made and how to make sense of what the financial documents reveal.

When it is proposed that a new product or service might be sold, which might be the development of a new workshop to propose and teach or some other intangible service, a Break-Even Analysis will indicate how many units must be sold, billable hours generated, or classes must be taught before the production costs will be re-couped and the new offering will be positioned to generate ROI.

Thanks for reading,

Kim

 

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Vacations Are Good For Business

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The Memorial Day Weekend is approaching and with it the start of summer and the most popular vacation season. Perhaps it is the legacy of the Puritan work ethic that has caused the mixed feelings that many in the U.S. have towards the tradition of taking time off to relax and unwind. There are many of us who feel that stepping away from work responsibilities now and again signals a lack of discipline or commitment to our jobs. Many of us brag about the number of hours we work each day and more is always better.

U.S. companies on the whole are stingy about granting paid time off,  as compared to their peers in Europe and Latin America.  Even Great Britain, original birthplace of the Puritans, gives three paid days off at Christmas, while the U.S. companies usually grant only one.  Easter is the most important holiday on the Christian calendar, but in predominantly Christian USA, there is no longer a paid holiday for Easter Monday.  In contrast, paid holidays for Good Friday and Easter Monday are standard in Latin America and Europe.

The Center For Economic and Policy Research reports that 25% of U.S. workers receive no paid time off of any kind—sick time, holiday, or vacation time.  An increasing number of companies that employ primarily low-wage workers restrict the number of hours that their employees receive, to keep benefits out of reach for as many as possible.

U.S. workers are ourselves complicit in the anti-time off practice.  According to the jobs and recruiting site Glassdoor, 75% of employees who are eligible to receive paid vacation time do not use all of their time in a given year. However, there may be a method to the madness, sadly. The global forecasting organization Oxford Economics (part of Oxford University) found that 13% of managers were less likely to promote staff who use all of their vacation days and that employees who take off fewer days on average earn nearly 3% more pay than employees who use all vacation time granted.

Let us tally the costs that the nose-to-the-grindstone approach has on our physical and psychological well-being  Even Sigmund Freud recommended that we take vacations. He and his family were known to travel every summer. https://freelancetheconsultantsdiary.wordpress.com/2015/07/07/dr-Freud-and-the-interpretation-of-your-vacation

Gradually, the hidden price of excessive work is being acknowledged.  Numerous studies have demonstrated that forcing oneself to work days on end,  sometimes at a furious pace,  is ultimately counter-productive.  Workaholic behavior has been linked to decreased productivity and creativity; insufficient slee,  poor nutrition and obesity; negative stress; burn-out and mental health issues.  Some business leaders have headed the warning signs.

Ron Hastings, CEO of Netflix and author of Freedom and Responsibility (2009), is considered the thought leader of a trend that advocates for offering unlimited vacation time to employees.  He believes that leaders should trust their employees to make wise decisions about when and how much vacation time to take, that balances the company’s’ needs and their personal needs.

Full Contact, a Denver software company, now offers a $7500 bonus to employees if they actually leave town when on vacation.  Conditions apply.  Those employees must refrain from using tech gadgets such as mobile phones or computers and refrain also from sending emails and texts.  Employees cannot work while on vacation.

Finally, Jim Moffat, CEO of mega consulting firm Deloitte extols the benefits of vacations,  stating “By taking a break from day-to-day operations, not only was I spending more much-needed time with my family, but also I was able to focus on the bigger picture of where we (Deloitte) were and where our business was going.”

Are you convinced yet? It’s not so easy for small business owners and Freelance consultants to take time off, but make it a point to get out of town for a weekend trip or two this summer, if possible. Your clients will be better served when you are rested and ready to deliver the solutions that they need.

Happy Memorial Day,

Kim

 

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Becoming Agile

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Agile innovation first swept through the information technology sector and greatly increased success rates in software development, improved quality and speed to market. Agile management techniques are now spreading to many other industries and Freelance consultants ought to be aware of what is involved, both as regards the ways our clients and prospects may buy into agile practices and how we might incorporate certain aspects into our own consultancies.

More than in the recent past, business ventures large and small operate in a highly dynamic environments.  Customer priorities and technological advancements are known to change rapidly.  Keeping a finger on the pulse of new developments and innovating or adapting  as necessary  the line of products and services offered,  marketing buzz words used in marketing content, sales strategies employed or distribution channels utilized are how organizations thrive and grow.  But what does agile mean in practice?

Agile does not mean doing the usual thing, only faster. Darrell Rigby, a partner at Bain & Company consulting and Hirotaka Takeuchi, professor of strategy at the Harvard Business School and CEO of Scrum, Inc., a consulting and training firm, describe agile business practices as containing the following elements:

Scrum. Creative and adaptive teamwork that solves complex problems.

Lean development.  Focuses on the continual elimination of waste.

Kanban.  Focuses on reducing lead times and the amount of time to complete a process.

Along with IT,  agile management practices are particularly well-suited to strategic planning activities, marketing projects, resource allocation decisions and supply chain challenges.  Sales and accounting, for example, are not a natural fit for agile, according to experienced practitioners. In sum, agile works best where complex problems can be broken down into modules and assigned to specific teams.

When solutions to the problem are unknown, product specifications could be subject to change, the scope of the work to be done is not precisely known, cross-functional collaboration is presumed to be vital and time to market is sensitive are the ideal conditions in which to apply agile innovation or methods.

For independent Freelance consultants and small business owners agile will have a different meaning, but it may be useful nonetheless.  Small business owners can surely incorporate agile methods into their organizations and see improved functioning.  Freelancers may be more apt to use agile as a marketing buzz word that communicates to clients and prospects that we are on the cutting edge of forward-thinking business practices and in tune with their priorities.  Freelancers who are themselves agile will be trustworthy external talent who bring ROI to organizations for whom we work.

Thanks for reading,

Kim

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Best Practices Basics

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When small entities do business, they (we) must try harder. Developing and maintaining a sterling reputation that creates a trusted brand that generates good word-of-mouth and referrals is how we succeed in business. Delivering excellent products and services every time is a must, but there are additional factors that play important roles. Instituting the quality control procedures collectively known as “Best Practices” as the basis of our operations protocols is the smart thing to do.

Because it is much easier to retain a current client than to find an new one, you may want to incorporate these “Best Practices” into your organization.

Keep your word

Credibility counts and that means you keep your word. If you are unable to meet a milestone or some other commitment, speak up as early as possible so that an alternative plan can be created and enacted. If you are transparent about potential roadblocks and obstacles, your forthrightful behavior will be appreciated and respected.  In sum, under-promise and over-deliver.

Be honest

Be truthful in every aspect of your business dealings. Avoid any and every temptation to misrepresent or exaggerate your expertise, qualifications, experience or ability to keep to a timetable or perform within a certain budget.

Follow-up

If half of life is showing up, then the other half is surely follow-up. If a client or prospect asks a question, follow-up with the answer. If someone makes a referral for you, or you promise to make the referral for a friend or colleague, then reach out (I did that today for a client and sent his contact info to a VIP who asked to check out his work).

Admit and correct mistakes

Sometimes we drop the ball. It’s embarrassing and frustrating, but one must own up. Attempting to blame others is not cool (even if it is someone else’s fault). Never attempt to ignore or cover up your organization’s involvement in something that went wrong. Instead, take responsibility, apologize and do whatever is possible to make amends and learn from the experience.

Arrive on time

Prior meetings can run long and you may be unable to leave. Traffic or public transportation can be in gridlock. The alarm may not go off.  If it appears that you will be late for a client meeting, make contact ASAP and estimate your arrival time.

In general, if you are one who is consistently late, take steps to allow yourself more time. Punctuality is a reflection of your brand and your organization’s ability to deliver. If parking is usually a challenge at your destination or if the weather is bad,  leave 30 minutes early and give yourself some wiggle room. Arriving early is always acceptable.

Say thank you

Saying thank you to those who do business with you is great for relationship building. On every invoice, I thank the client for being a client. At December holiday time, I send cards to current and lapsed clients. I’ve taken clients to coffee and lunch. I thank visitors to this blog for reading my posts. Showing appreciation is always appreciated.

Thanks for reading,

Kim

 

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Fatal Flaws in Your Business Plan

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A business plan is the blueprint, or road map, that guides aspiring entrepreneurs as they build their business venture. Business plan writing is about getting the details right as you keep in mind the big picture.  I’ve taught business plan writing since 2008.  I was invited by the program manager of an SBA-affiliated women’s business development  organization to teach a 20 week course that met once a week for three hours and students wrote their plan week by week.

A couple of years later,  I developed a six hour workshop that does not ask students to write their plan but rather, I present material that shows them the information that will be included in a good business plan: a marketing plan (including customer identification, branding and pricing), financial projections, operations processes and other elements.  We talk about how to do research and how the information discovered will help them build a successful business and if desired, attract investors as well.

When envisioning a potential business concept or writing a business plan, it is possible that unrealistic expectations or flawed thinking could influence the process.  Sometimes, one is just so excited about the great business idea that has surfaced that the adrenaline “rush” distorts clear thinking, such as the ability to see potential stumbling blocks that would require precautions to avoid.  Below are a few scenarios that entrepreneurs-in-the-making should beware.

Unrealistic expectations about the need and value of your products or services

While it is sometimes true that starting a business with yourself as the profile that represents the target customer is a smart idea, since you understand the value and availability of that product or service,  you may misinterpret the size of the market and the traction that can be achieved beyond a select group of true believers.

Insufficient information about target customers

Whether or not the target customer is modeled on you, research must be done to verify the number of potential customers who have the money and motive to do business with you,  regardless if this is a B2B or B2C enterprise in the making. You must identify the need for your products or services—what problem will you solve, what solution will you provide?

Furthermore, you must understand the buying process—who is the usual decision maker (the COO or the head of maintence?),  how will purchases be made and what is the tolerable price range? Lastly, from whom are your potential customers obtaining these products and services now? You must also identify and investigate competitors.

Vague about how to access customers

Especially in the B2B sector, access to customers is everything.  Some fields really are a closed shop. You may know who the ideal customers are,  know and describe well how your products and services fit their needs and know how to price and deliver them.  But if potential customers do not have the confidence to do business with you because you have not received an endorsement from a source that they trust, you will starve.

Overestimating cash flow

Usually, a business does not achieve desirable gross sales, and hence will not show a net profit, in its first year of operations.  Businesses that require high start-up costs especially will require a longer ramping-up period. The business plan must acknowledge the potential for negative cash flow and demonstrate how fixed and variable expenses will be met during that period.  One must know how inventory will be financed,  how payroll will be met and how the store or office rent will be paid.

When writing a business plan,  conservative financial projections are strongly advised.  Acquisition of paying customers may take longer than you expect and the size of their purchases may initially be small and infrequent.  Moreover, it is entirely possible for a venture to be profitable on paper and still suffer from cash-flow problems, because customers do not pay their bills on time.

Underestimating start-up costs

Developing a reasonable estimate of how much it will cost to get the venture up and running is essential.  If certain permits must be in hand, if certain tools or equipment are must-haves, then you must know the costs of securing all of the above.  If you’ll need to hire employees,  it’s essential that you have a good idea of the staffing needs up front (you can always hire more as customers increase).

“Magical thinking” business model

The business model is the design for how your venture will become profitable.  Well thought-out interactions between marketing, financial and operational processes will promote and sustain profitability and you must map out how these will occur. The business model describes the core fundamental actions of the venture.

The value proposition of your products or services will be described.  The resources that your enterprise will have to promote and defend the value proposition— the intellectual property that you’ve developed,  or patent rights, key relationships, or capital—will be accounted for.  Sales distribution channels will be detailed.

Getting to Plan B, a 2009 book by Randy Komisar and John Mullins, describes key business model components and advises business plan writers to segment the business model chapter into sub-headings such as:

  • The revenue model,  which describes what you’ll sell, the marketing plan and how you expect to generate revenue.
  • The operating model, which will detail where you’ll do business and how the day-to-day will function.
  • The  working capital model, meaning your cash-flow requirements.  Cash-flow means that you’ll know when money will be in hand to meet expenses like rent and payroll. It is subtly distinct from revenue.  The business can generate adequate revenue and still suffer from intermittent cash-flow problems.

Your business model keeps you organized and your priorities realistic. Matters such as quality control,  collecting accounts receivable,  inventory management and identifying strategic partners mean much more than your number of Facebook followers, for example. Best of luck to you as you work to launch your new business!

Thanks for reading,

Kim