Part 2: What Every Successful Business Owner Should Know About Their Business
The Daily Cash Flow Break-Even Sales Point
After creating the business development plan (outlined in my previous post), the second thing I believe the smart business owner must come to grips with is the daily cash flow break-even sales point. No rocket science here. If a business is to thrive, “cash in must exceed cash out.” Bottom line – savvy business owners know whether today’s sales and cash collections satisfied the requirements of today’s average daily cash expenses.
How do you calculate your daily break-even sales level? Begin by using your business’ financial statements to add up the required total cash expenses for the last twelve months. (If you’re a start-up, use the cash flow projection you created as part of your business development plan. WESST advisors are here to help you with completing this essential task.) The expense total will include your company’s cost of goods sold, employees’ gross payroll expenses, utilities, rents, leases, interest and principal costs, taxes and, of course, your salary or draw.
This “cash out” total then becomes the numerator of the equation. Divide the numerator by the number of days your business is open for business during the year (excluding weekends and holidays). The resulting answer is your business’ daily average break-even sales point.
The answer can be eye-opening. By making this calculation, expect to learn where your cash is going and how your business stands as you lock your door at the end of a day. You’ll learn whether your current average sales volume is too low to support your business or, conversely, if your average expenses are too high. For most small businesses the chances are the answer will suggest taking actions to both boost sales and intelligently reduce expense. After all, what’s wrong with the idea of increasing your realized cash profit margin on sales?
We recommend the daily break-even point be recalculated on at least a quarterly basis – more frequently if your business is undergoing rapid change or growth. Lastly, we encourage business owners to share the result with trusted team members. Their understanding of the essential connection between sales, expenses and paychecks is not to be taken lightly and they’ll find it a healthy and stimulating challenge to “top” the daily break-even bar.
Next time I’ll cover the concept of identifying and pursuing clients or customers that fit your ideal customer or client profile.