Break-Even Point Can Be Hard to Figure for the Operator of a Service Company
Q I am starting a computer consulting firm and have found that managing cash flow is critical. What is the best way to figure out how much money I need to borrow until I reach a break-even point? Also, can you recommend a good software package that figures cash flow over a 12-month period?
--Brian Beck
Sales director, ConsultNet, Salt Lake City
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A It is very easy to figure out the break-even point in a manufacturing company because you have fixed costs. But in a service industry, it’s hard to know. Costs for telephones, employees and even secretarial services are all variable.
Typically, new companies borrow money for long-term assets, such as computers and desks, on a 60-month basis and make payments each month. They also get short-term (typically 12-month) loans of working capital that are paid back as revenues start to flow in. A new company also must start business with some kind of cash reserves.
If you find that you are not making enough money to begin paying back those initial loans within six to eight months after you open for business, you may have gone into the wrong business. Of course, this depends a lot on your personal situation. If you are single and can live very cheaply, you will be able to get by on a very small cash flow. If you have a family to support, that probably will not work out well.
If your cash flow is lagging, think about cutting your overhead. Often, the intense overhead costs are surprising to people who go into business for themselves for the first time.
There is a software package our firm uses to manage cash flow, and we like it a lot. It’s called “Up Your Cash Flow.” It has a lot of flexibility, so we can format it to our own specifications, and it is produced by certified public accountants so it has credibility and a large following. The program is advertised in most business magazines and trade publications. Along with purchasing software for cash flow, you may want to think about buying a program that tracks your contacts with potential clients and customers.
--Donald Lucove
Senior partner, Lucove, Gastwirth, Say & Co., certified public accountants, Calabasas
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Q: I am considering opening an ice cream store. How do I go about researching what would be a good location? Would it be a good thing to open near an existing store since it already has an established business base? Also, what is the best way to find suppliers and make sure I am getting a good deal?
--Bill Miller, Irvine
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A: You choose a location by researching the basic demographics of the areas that you think have potential as sites for your store. Be aware that families drive a lot of ice cream sales. Also, you want to find a location that has a fair amount of foot traffic--both during the day and in the evening. To a great extent, buying ice cream by the cup or cone is an impulse purchase, so you will want to be in an area where people will walk by and stop in. Choose a place where people gather to shop or find entertainment--like a mall or a regional downtown.
Opening near your competition is smart only if you are going to open a franchise and your competition is also a franchisee. That way, you are likely to split the local sales. If the competition is a known commodity and you are opening an independent store nearby, you are likely to get crushed. People will go for the known quantity unless your product is so outstanding that it commands a premium.
As for suppliers, if you are opening a franchise, your headquarters will provide you with a list of authorized suppliers to deal with. If you are opening an independent store, the only way to choose suppliers is to shop around and compare prices. Just remember: Price is relative to quality.
For more information on these and many other critical issues, you can write our organization for a free copy of a publication called “So You Want to Open a Restaurant?” It includes the outline of a business plan as well as discussions on leasing versus buying, location and many other crucial topics. Write to the California Restaurant Assn., 3435 Wilshire Blvd., Suite 2230, Los Angeles, CA 90010.
--Gerald Breitbart
Consultant, business issues, California Restaurant Assn.
If you have a question about how to start or operate a small business, please mail it to Karen E. Klein in care of the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016 or e-mail it to business@latimes.com. Include your name, address and telephone number. The column is designed to answer questions of general interest. It should not be construed as legal advice.
