I recently had a client sell off their assets and close their business. They had chosen a venture that could be successful and they were marginally successful. But their margins were small, so they need a tremendous amount of volume to cover the fixed costs, let alone the variable costs.
Fixed costs are relatively easy to figure out, rent, utilities, insurance, etc. The variable cost of hourly wages, workers compensation and cost of goods require a certain amount of finesse to hold down and control.
During the initial planning stages of a business, these calculations should be made and evaluated. This evaluation should also include the achievability of the volume necessary to cover both the variable and fixed costs. The business should know what it’s breakeven point will be.
The financial dashboard of the business should be monitoring this data on a weekly if not daily basis to ensure that costs are being contained and revenues maximized and waste controlled to the extent possible.
The data has to be good, reliable and accessible to be useful.
The client had not done the evaluation part before the business was launched. The data was not maintained on a monthly basis, so the financial dashboard was non-existent. Controls were being put into place for basic analysis. But then an offer come in and it was easier to sell, than start the evaluation and controls from scratch while running the business.
The client has learned from their initial mistakes and is looking at other opportunities and plans on doing everything in the correct order moving forward. For their next venture they plan to have us with them at the start of the process, not the end like the closed business.