Here's a typical example to think about. Donna wants to re-start her business which did not do very well the first time around. She has been very busy with other things and did not have much time to devote to it. Her gross sales were $15,000 the first year, but only $8,000 the second year. Obviously, she has not made a profit "on paper." She wanted to try a business to see what it would do. Now she wants the business to really grow so that it can support her and her children. Donna wanted us at the SBDC to help her "make her business work."What are the things that she must do for this activity to be a real business? First, Donna must commit the time and effort that it takes to really build a business. She may have to make some major changes in her lifestyle. Donna spends most of her day caring for her children and doing volunteer work in the community. Both of these are admirable activities, but can she rearrange her life enough to devote major time to her business?
Next, what kind of income does Donna need to support herself and her children? After some deliberation, together we determined that they can live on about $40,000 per year after personal taxes—in other words, $40,000 in money to spend. She receives $7,000 per year in child support. If Donna needs $33,000 in net income from her business to support her family, then how much does the business have to gross in order to pay her such a "salary"? This is not an easy question because she would have to determine the gross profit margin of her business. She basically knows about how much she had in gross sales, but not the gross profit margin. What can we do with the information that we have?
Third, what kind of income does the business need to support its operations? The business has expenses just to exist. What are those expenses? Donna does not know exactly. She has operated the business out of her home. According to the tax records, she claimed $1500 in expenses for her business for the last two years. How accurate is this figure? What will be added as the business grows? Can she continue to operate her business from her home? After some research, we decided that she could operate from her home. She obtained zoning approval; then she obtained a business license.
Donna and I began working on how to determine what the real fixed expenses would be for her business. With the information that Donna gathered, we developed a cash flow projection for the next twelve months. Donna's personal money needs became the basis for her salary in the projections. Each fixed cost was examined for need and accuracy. What about advertising? Donna had relied on "word of mouth" advertising for her business thus far. She realizes now that this method is not enough.
After Donna investigated the costs of various media advertising, we developed a plan for promoting her business. She was surprised at what it would cost. After her salary, advertising was the next highest cost. The fixed costs for her business would be $75,285 for the next twelve months. What sales level did the business need just to cover these expenses?
Donna's business did not have enough history or records to determine a gross profit margin. For her industry, the gross profit margin has been about 38%. Using this number, we arrived at $198,118 to be the breakeven annual sales for Donna's business. The challenge for Donna is to build sales.
Donna will have to be committed to her business. This business can succeed with good planning, Donna's proactive effort, and her commitment to doing what it takes. Can she do it? Of course, she can!
Now, how can we help you?
