Walter White was a normal everyday school teacher. Then, there was a turn of events that lead him to breaking bad; that place where he took a turn to the dark side. Once he made that turn, going back was never an option. Too much had happened. He just had to survive on the other side. We all knew that eventually it would end…and it wouldn’t be pretty.
Is your business just one bad turn down that same path headed toward a brutal end, leaving a path of destruction in its wake? Too dramatic? Maybe. But if you have been an employee, or a creditor of a business that took a wrong turn, you might not think it is so over the top. One day you had a job and the next day you find out you (and 400 of your friends) don’t when you can’t log in to your computer. Maybe the employees had warning, but probably not. The company usually tries to hide it for fear of triggering a downward spiral when employees and creditors get scared.
The problem is when you are a novice business owner, you don’t know that you have made that step to the dark side until that spiral has already started…then it is nearly impossible to recover. Ignorance often is not bliss. It just seems like it because you don’t know enough to be afraid. But fear often is warranted and can be useful to create the right kind of action to keep from stepping into the abyss.
Every business starts out like an infant; fragile and unable to survive without constant care and vigilance. But what does it take to get beyond that stage? And why do so many fail? Often they simply run out of cash. Sales didn’t get past expenses. Or to put it another way, they never could break even. But I think the problem is even simpler than this…they didn’t know they weren’t breaking even. They didn’t know, primarily because they misunderstood the concept and/or they just didn’t have a good handle on the numbers. So how do you keep your business on the right side of breaking even?
Know your numbers
Not knowing your numbers is like aiming for a target that you can’t see. Chances of success are slim and probably random. But the error the novice makes is thinking just in terms of cost of goods sold. Cost of goods sold is the direct cost of providing your product or service. For example, you buy 100 t-shirts for $5 each that you plan to resell. Your cost of goods sold is $500. Covering this cost is the first step. But that isn’t enough…not even close. But that is the first mental calculation the newbie makes. The danger with this kind of thinking is that you don’t sell your product for a high enough price to ever survive. Classic rookie mistake.
Covering Cost of Goods Sold Isn’t Breaking Even
There are so many more cost that need to be covered. Did Walter and Jesse think about selling their infamous blue meth for the cost of the chemicals? No. They had a lot more costs to cover than that. What about the RV they had to buy? The gas they needed to drive it out to the desert? Distribution costs? They had a lot of costs to cover.
What are all your overhead costs? Every business is different so you need to think through the whole process of who is the customer and how does your product make its way into their hands. Think about the t-shirt business. Will it be a retail store? On line store? Pop up shop at festivals? How will they be packaged? How will people hear about your product? How will you get customers to your location wanting to buy your product? How will the money be collected? Cash only? Debit or credit card payments? Wholesale sales? What accounting or legal expenses will you have? Sales staff? Etc., etc., etc. Often it is hard to know what all these costs will be. But estimates are better than nothing. All these costs have to be covered by sales.
Understanding Variable and Fixed Costs
Figuring out the breakeven point requires that you not only know what costs you need to cover but also which of your costs are fixed and which will vary with the amount of sales. Your lease rent will probably be the same every month regardless of how many units you sell. Sales commissions will probably vary based on sales. Understanding how these costs react or don’t react to sales volume helps determine how much volume you need to sell. It also helps set the floor for your price. Selling at a price below what it takes to recover all your variable costs can never be corrected by selling more.
Don’t Ignore or Dismiss Costs
The one cost most often ignored? Paying yourself. Maybe you can survive a while without paying yourself for the work that you do. That will help cash flow for sure. But you probably can’t do that forever. Even if you can, you shouldn’t. Your time is a real expense. You shouldn’t ignore it.
And what about all your startup costs? Truly breaking even gets you to that neutral place where you are neither ahead or behind because you started the business. That means all in…all expenses and time covered.
Breakeven Is Never Enough
But, aiming for breakeven is never enough. No business survives without profit. Even too small of a profit will sink you. In his book, Simple Numbers, Straight Talk, Big Profits; Greg Crabtree explains how a 10% profit should really be considered the new breakeven point. Because without profit you will never be able to pay off the debt you incurred to start, build reserves or pay dividends to investors.
The rookie thinks revenue is the key driver and doesn’t distinguish it from profit. The problem is that you can have a lot of revenue and zero profit. It may seem like you are making progress if revenue is growing. But you can grow yourself broke if you aren’t profitable.
One Thing Walter Got Right
I’m not recommending using Walter and his blue meth as a model, but there is one thing that Walter did understand well in his “business” venture. That one thing is actually a huge thing. He made a product that was completely unique and superior to anything that was already in the market. This gave him the ability to charge a substantial premium price and well beyond the cost of production while still maintaining demand.
*If you haven’t watched the TV series Breaking Bad, you may not understand some of the references made in this blog. You can cheat and read this for clarification…but watching the series is way more fun.
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