“What is success?” When asked this question, entrepreneurs will give different answers. Some will say success is achieving independence, control and security. Others may say that it is power, acclaim and money. Still others will say that it is having friendship, practice, even rising from failure. And so on and on …
Success is tough to define. A business normally passes through several milestones, that when achieved, proves that the business is on the right track. These milestones serve as indicators that the business is growing and expanding – in the right direction.
A successful business does not happen overnight. You don’t start a business, and expect it to earn profits the next day!
First Indicator: Achieving the Break-even Point
After you have determined that your business idea is feasible, you should begin to focus your efforts in business development. This involves market research, cost calculations to see if you can make money and determining prices. Before launching your business, you need to know the one-time costs you will incur for start-up. The smart entrepreneur needs to know exactly what the startup costs will be for the business, and makes sure there’s more than enough capital to cover those costs and any contingencies.
A new entrepreneur must also calculate a very important piece of data: the breakeven point. Stated simply, the breakeven point shows what level of sales (in unit volume or dollars) is needed to offset all fixed costs of doing business and the variable costs of producing products. Fixed costs are expenditures on which the level of sales has no effect, including rent and loan or lease payments. Variable costs are directly affected by sales volume and can include labor wages and utilities-hourly workers and electrical consumption, for instance, can chew up more or fewer dollars month to month depending on how well sales are proceeding. Many believe that high sales will automatically lead to high profit. But profit only comes after you have exceeded your break-even point.
Achieving the monthly breakeven point is the first indication that your business may be viable. At this point, though, the proprietor still has no income. Breakeven means that expenses are equal to revenue. Profit is zero. The paycheck for a proprietor is profit.
Second Indicator: Earning a Living Wage
You know that your business is starting to do well when it can provide you with a living wage. After months of living on very tight budget and no income while starting your business, you have now reached the stage when you can start to draw income.
However, there is still no real profit, because all the income is consumed by the owner’s need for a living wage. A living wage is just that: one that your family can live on. This stage is similar to having a regular paying job with a stable paycheck. At this point, the small business entrepreneur is doing as well for himself or herself as they would be working for someone else at a similar level. There is nothing left over.
The business as yet has not demonstrated an ability to generate a return on investment. Most small businesses fall within these categories, earning just enough to yield a living or respectable wage for the owner.
Third Indicator: Achieving Real Profit
Your investment becomes a successful business only when it can move beyond the respectable wage category and contribute real profit. Real profit is cash left over after a respectable wage is provided. The ability to earn real profit is the dividing line between owning a job and owning a business.
At this stage, your business not only provides you with a respectable wage for time spent, but it also is able to pay you back with all the cash that was invested. It goes beyond payment for any principal on debt or income taxes owned. After paying the obligations of the business, all of the cash profit that is generated is discretionary cash. It is not obligated by loans or other debts. It provides the owner a respectable wage and cash left over. A business at this level becomes more valuable than the value of its assets. It is generating a return on investment and positive cash flow.
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