While industry pundits and investors love to talk about the growth, profits and market dominance of startup companies, there’s a special place called “breakeven” that is a beautiful nirvana for all entrepreneurs.
Breakeven represents a place where entrepreneurs can finally take a short breath of relief and figure out where to take their businesses next. It’s a destination that very few companies reach, sometimes because they are reaching too far and sometimes because they don’t reach far enough.
Breakeven isn’t an end game, it’s a rest stop along the way. But the power of having options versus choices is immeasurable to a young business.
Think about it this way – a business losing even one dollar per day will eventually go out of business. But a business at completely breakeven will continue forever. Breakeven buys you valuable time to make key changes, evaluate decisions, and maintain a favorable equity structure. Anything less than breakeven removes just about all of these options!
The very definition of “breakeven” varies greatly depending on who you ask. Some will say that if the business itself is paying for its costs of goods then it’s at breakeven. Investors will say that when the business has enough capital that it can pay its employees, marketing costs, and costs of goods, then it’s at breakeven. The entrepreneur, of course, likes to think that breakeven means he’s finally paying his own bills with the company’s money, not his personal savings!
Ultimately, they’re all right. Getting a company to breakeven is about finding the acceptable point at which you believe the business is fending for itself, although there are different important milestones along the way.
If the business can’t get past the point where it can at least cover the costs of goods, you know it’s in serious trouble. I call this point “Cost Breakeven”. At its most basic level, the business should be charging more for the product than it costs to produce it, even if it’s not throwing off any cash to its contributors.
On the other hand, if the business is at least paying for itself while generating increasing value through satisfied customers, an improving reputation and more market share, it becomes a valuable asset even if it’s not a profitable one. The business is at Cost Breakeven.
Cost Breakeven is valuable if the entrepreneurs still have another way to generate personal income for themselves while continuing to nurture the business. Many “side businesses” are run this way, as the entrepreneur gives the business time to build itself into a larger franchise.
When the business starts to generate enough extra cash to be able to start paying a few employees or infrastructure to help it grow, this is considered to be “Operating Breakeven”. Operating Breakeven is a strange place to be because it’s purgatory between success and failure for the entrepreneur personally.
On the success side, the business is growing and it can afford to start building its own infrastructure for growth, which is fantastic. We all love us some growth.
Unfortunately all that newfangled infrastructure comes at a price – the entrepreneur’s time. At which point the company takes on employees and operating costs, it’s near impossible for the entrepreneur to treat the company as a moonlighting gig, which means his personal income suffers greatly.
There are lots of creative ways for the entrepreneur to get out of this situation, but the most common is for them to dig in and replace the people or resources he’s paying as part of the infrastructure, transferring their costs into his personal income. Other options like working a side job (consulting is often popular) are viable in the short term, but are very difficult to maintain long-term.
If the entrepreneur is fortunate enough to make it to that magical place called “Entrepreneur Breakeven”, then they’re actually putting some of the company’s proceeds in their own pocket – enough to pay for basic expenses.
The beauty of Entrepreneur Breakeven is that you can actually think long-term about the options the business has. Without being at Entrepreneur Breakeven all kinds of horrible choices present themselves – leveraging home equity to pay your own bills, taking investor money at horrible valuations, or signing deals that pay next month’s expenses, but create a long term albatross for the business.
Even if the business never grows beyond the lifestyle stage for the entrepreneur, this point at least gives the entrepreneur an opportunity to make the decision to keep the business going on his own terms. It also allows the company to weather a longer-than-expected storm until market conditions can give the company a chance to grow again.
In good times, and especially in bad times, the prospect of breakeven may not sound like the most exciting place you could ever take your business, but it’s a critical milestone to get to.
By concentrating on each of these breakeven milestones, you can begin to systematically grow the business in a way that doesn’t put negative pressure on you, the entrepreneur which in turn destroys the value of the company.