Category Archives: Finance 101 – Business Financial Literacy

Finance 101 – Business Financial Literacy – We connect the dots on various key financial concepts, making them ACCESSIBLE and USEFUL.

Understanding Break-Even

One of the start-up business basics is determining break-even – the point where your sales supports your overhead.  Beyond break-even lies profitability.

And while it is just one of many financial ratios we consider – it is a primary decision tool for anyone launching a new venture.  It is the feasibility test.

“In order for the business to hit breakeven, we need to sell 10,000 widgets.  Can we realistically expect to sell 10,000 widgets?”

Breakeven = Fixed Costs/Sales – COGS

For example –
I sell hotdogs.  My cart, licensing, insurance and marketing run about $600 a month.  My food costs per hotdog are $1 and I sell them for $3.

$600/$3-$1= 300 hot dogs a month to reach breakeven.

Further, if I break this down by the number of days I sell hotdogs – 5 days a week (20 days a month) then 300/20 = 15 hot dogs a day to hit break-even.

Most small businesses need to support the owner, so to figure how much I need to sell to make $1,000 a week I add that to the fixed costs.  $1,000 a week for 4 weeks = $4,000.

$4,000 + $600/3-1 =2,300 hot dogs a month or 2,300/20 = 115 hot dogs a day.  So as a perspective business owner, I need to figure out where I can have my cart to make sure I am selling 115 hot dogs a day.

Obviously, changing the pricing impacts the break-even analysis.  If I raise the price of my hot dogs by $1 and assuming all else stays the same – my new break even is $4,600/4-1 = 1,533 hot dogs a month or just 76 hot dogs a day.  Be careful though – raising your prices can impact your sales.  If your customers feel $4 is too much, they’ll go buy somewhere else.  Your pricing needs to be in line with what customers are willing to pay.

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Understanding Venture Capital Term Sheets

Term-by-term teardown of venture capital equity and bridge note term sheets for startups and entrepreneurs. What to look for and what to avoid.

Venture Capital Term Sheets: The Good, The Bad & The Ugly

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Determining The Worth Of A Small Business

Cash Flow, SDE – Determining The Worth Of A Small Business | BizBen | BizBen.com

The value of the small business is mostly determined by the cash flow (or business brokers use the term “Seller’s Discretionary Earnings” instead to be more accurate).  Seller’s Discretionary Earnings (SDE) is defined as net income before taxes (operating income); interest; depreciation and amortization; owners compensation; owners benefits; and non recurring expenses.

Most small businesses sell for 1.5 – 3.5 (multiples) times the yearly SDE, depending upon the value factors of the business. Things that determine the multiple or value factors are the stability of historical earnings; business & industry growth; type of business (service with few assets to manufacturing with significant assets); location & facilities; stability & skill of employees; competition; diversification of products, service & geographical markets; desirability of the business; depth of management; and terms of the sale. The national average is 2.76 times SDE.

The value of the small business is mostly determined by the cash flow

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Financial Literacy for Small Business

We work with business owners and executives to help them “get” the numbers.

We make sure that you understand the finances in your business – both in the financial reports and in how your business supports (or doesn’t) your goals and aspirations. We make sure that your numbers have real context and that you “get it” so you can succeed in your business.

We provide financial literacy services that are completely focused on business. We know the language and will speak it regularly with you.

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