When we build financial models here at Axxess, we calculate to the penny how much our clients will need to spend before their companies turn a profit.
If only our clients were that meticulous about their finances on the personal side. (Did I mention that we are in a recession?)
The truth is that few entrepreneurs–or many other people, for that matter–bother to think about their personal break-even, especially if their entrepreneurial ventures are being bankrolled by their husbands, wives, parents, home-equity credit lines or their friends at Visa, MasterCard and American Express.
And, ultimately, that becomes a problem. Because no matter how passionately you believe in your dream and how much sweat equity you’re prepared to put in before you draw a salary, Con Ed and your landlord want their money now. So while I’m all in favor of debt financing if you’ve got the cash flow to cover it, borrowing money to make your payments is just digging yourself deeper into the hole.
Last week, I sat down with a client of mine (he’s a database consultant by trade) who’s building a billing software application for self-employed professionals. Based on his calculations, he told me, he would have to bill 90 hours of consulting services a month in order to break even on his monthly nut (rent, electric, food, etc.) At this point, he’s billing only 60.
Now don’t get me wrong. While I love the concept of calculating one’s personal break-even, it’s not as if I walk into Bergdorf’s thinking, “That’s a two-consulting-sessions pair of shoes” or “All I need to do is sell one more business plan and I can afford that designer dress.” The truth is that I buy most of my clothes at Ann Taylor and Banana Republic anyway.
What I like about knowing your personal break-even is that it gives you options. One way to boost your cash flow is obvious: Find more clients and bill more hours. You can also raise your hourly rate if your clients allow it. And if Plans A and B don’t work, you can lower your overhead (i.e., move to the suburbs).
Back in 1995, I had a mortgage, a car, two little kids and a startup company called NetCreations that wasn’t making a whole lot of money. It wasn’t until our company celebrated its third anniversary that I was able to completely walk away from the writing, consulting and publishing that I’d been doing to pay the bills and live off my salary as NetCreations’ CEO.
So, while I don’t claim to be Suze Orman, I think the message is clear: When it comes to building a business, you’ve got to do the math–and that means crunching your personal numbers, too.
This entry was posted on Tuesday, April 1st, 2008 at 5:13 pm and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.Leave a Reply
