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the music business remains an ongoing conundrum for musicians . . .
A Pay-What-You-Can Music Model
By ALLAN KOZINN
Even before the record business imploded, musicians regularly brainstormed about ways to get their work to potential listeners. But Carla Kihlstedt and Matthias Bossi were feeling more than the usual sense of urgency when they came up with a novel plan, a subscription Web site, Rabbit Rabbit Radio, to distribute new music by their latest band, Rabbit Rabbit.
“Every other conversation you had with a musician, the gist of it was: ‘The business is falling apart. What are we going to do?’ ” Ms. Kihlstedt said by phone. “I can’t tell you how many times I’ve worked really hard on a CD, for however many months or years, and then you hope the label does its job and gets it out, and that the stars align. But at a certain point, we got tired of complaining and began saying, ‘O.K., what are we going to do?’ ”
With some help from George Hurd, a composer and music administrator, they produced a blueprint for Rabbit Rabbit Radio and started the Web page in February 2012. The plan was to release a new song for subscribers on the first of every month. Along with the song, Ms. Kihlstedt and Mr. Bossi, who are married to each other, began posting video clips, slide shows and photo albums; information about the making of the track; essays on various subjects; and lists that might include links to clips by other musicians whose work they admire or notes about restaurants they have discovered on tour. Past releases can be explored in their online archives.
Subscribers pay $2 to $5 a month. (There is no difference in access; it’s a matter of paying what you can.)
“In order to work,” Mr. Bossi said, “we get so involved in preparing the material surrounding the song that it feels like we’re putting together a magazine issue every month.”
So far, 18 months into the project, Rabbit Rabbit Radio has nearly 900 subscribers. Ms. Kihlstedt, 41, and Mr. Bossi, 34, who live in Dennis, Mass., said they would be happy if their subscription list grew by 500 listeners a year.
“Our goal is to be able to count on Rabbit Rabbit Radio as part of our monthly income,” she said, noting that if you factor in Web hosting fees, site management costs and other incidentals — to say nothing of the time they put into recording the music and preparing other materials — they are barely making a profit. “But we’re taking the long view and giving it three years.”
The first subscribers were drawn from followers of Mr. Bossi and Ms. Kihlstedt’s other bands — the art-rock group Sleepytime Gorilla Museum and Causing a Tiger, an improvisatory ensemble — as well as fans of Ms. Kihlstedt’s various ensembles, which include Tin Hat and 2 Foot Yard. (Ms. Kihlstedt also has a career as a classical composer; she performed her recent song cycle, “At Night We Walk in Circles and Are Consumed by Fire,” with the International Contemporary Ensemble at Mostly Mozart on Saturday evening.)
“We spread the initial word about the site in a very grass-roots kind of way,” said Mr. Hurd, who manages the site. “We reached out to Carla and Matthias’s fan base that they’d been amassing over the past couple of decades. We also created a series of original video commercials to promote each month’s content, and asked our fans to share them far and wide.”
Rabbit Rabbit’s material is varied — often lighter in spirit and more pop than Sleepytime Gorilla Museum’s music, but sometimes driven and experimental as well. Sometimes a song reflects what they’re up to during the month they recorded it. “Merci Vielmal,” which they recorded while they were touring Europe as part of the guitarist Fred Frith’s band Cosa Brava, is about crossing linguistic and geographical boundaries, and was recorded in trains and backstage at clubs in France and Switzerland. Their most recent offering, the laconic “Before the Sun,” is a collaboration with the Chicago band Cheer-Accident.
Thymme Jones, a member of Cheer-Accident, said that his group planned to adopt the Rabbit Rabbit Radio subscription model, starting in September.
“The instant I saw what they were doing,” said Mr. Jones, who was a subscriber from the start, “the light bulb went off, and I thought, ‘We’re going to rip off this idea.’ For us, it will be an interesting way of doing things differently after 25 years of releasing physical discs. And if my math is right, we have tons of people on our mailing list.”
John Schaefer, the host of several radio shows on WNYC that focus on new music, said the subscription model struck him as a plausible way for some musicians to supplement their performing income. “If Radiohead did this,” Mr. Schaefer wrote in an e-mail, “it would go through the roof. If a local indie band did it, it might still be terrific, but I’m not sure how successful it would be. What makes it work, I think, for Carla and Matthias is that they have enough of a following to get them started and then the resulting word of mouth will hopefully sustain it.”
Ms. Kihlstedt and Mr. Bossi have looked at other models as well, including those like Kickstarter and ArtistShare, which encourage fans to provide money for musicians’ projects. Ms. Kilhstedt used Kickstarter to raise money for a song cycle, “Necessary Monsters,” and found the experience valuable, even though, she said, she went overboard with the gifts she sent to fans who contributed. (Contributors to that project, she said, were also given free subscriptions to Rabbit Rabbit Radio.) They are currently working with Fractured Atlas, an organization that helps independent artists raise money and organize their business affairs.
“We’re about to release our 20th issue,” Mr. Bossi said, pursuing his magazine analogy. “And we’ve gotten better at working fast and meeting our deadlines. This fall we’re going to spend some time getting the word out in a bigger way, and pushing it to the next level.”
raising morale by crunching the numbers . . .
By JAY GOLTZ
Here is an e-mail I recently received from a distressed business owner. Her name is Michelle VanAllsburg, and she owns a salon, The Hair Co., in Grand Rapids, Mich.:
Jay,
I stumbled upon your site, and you seem like someone that understands what I am going through. I don’t know what to do, or what steps to take. I am 32 years old, and at the age of 23, I purchased the salon I had been working at since I was 15 years old. I had been a receptionist from 15 to 19, and grew my clientele extremely fast from 19 to 23. My boss was burnt out from running the shop, and she asked me to buy it from her.
I was only 23, young, and stupid. I trusted this woman, as did my parents. I ended up not being able to get a loan at a bank, since I was so young, and I ended up borrowing a ridiculous amount of money from family. Needless to say, I got screwed, and the staff that loved me didn’t want me for a boss because I was so young. I basically had a walk out, and it took me four years to get a great group of people, but I am now burnt out. …
I have now owned it almost eight years, have made no profit, and have a family that I want to focus on. How on Earth does one try to sell a business that doesn’t really profit but just pays the bills and has some money left over?? I have a great staff of “nice” people, but they just are not busy enough. I have given them all my clientele so they are busier and don’t leave. My husband supports us, and I only work two days a week. I only work two days so that my parents can watch the kids for free, but they can’t do any more days, and I don’t want to pay for child care.
I am stressed out with all this debt I owe my family, and I just want OUT. I know I won’t be able to sell it for what I owe, but my accountant is getting numbers together for me so I at least know where to start. I am just done trying to build something that is not building fast enough.
Is there any advice you can give me??
Stressed out mother of two little ones,
– Michelle VanAllsburg HELP
I always feel bad for entrepreneurs who follow their passion and then find themselves in a big dark hole. And in this case I appreciated Ms. VanAllsburg’s predicament and her brutally honest perspective. From the few details in the e-mail, I was confident that I could at least give her some moral support — and at best maybe some suggestions. I know how lonely it can feel to be an entrepreneur. I called her and got right to the point. What follows is a summary of the conversation.
Jay: First of all, you said you got taken advantage of in the sale. You worked at the salon for years, and the owner was like a mom to you. How do you figure you got taken advantage of?
Michelle: The salon was doing about $200,000 per year, and I paid her $120,000. It was making about $40,000 per year. I paid too much.
Jay: I don’t know why you are under the impression that she took advantage of you. It sounds like a fair price. And even if it wasn’t, get over it. She asked for the price, and you paid it. You were not cheated. It is waste of thought and energy.
Michelle: I already have. I just want to get out from under this.
Jay: Who do you owe money to?
Michelle: My parents and my in-laws. Don’t get me wrong — they have been very nice about it. But my parents took a home-equity loan on their house. It makes me very anxious just thinking about it.
Jay: What are the numbers today?
Michelle: I’m grossing about $180,000 per year. My rent is pretty low, about $1,000 per month. And I do a 50-percent split with the hair stylists. I’m not making any money, and my husband kids me that I am working for free.
Jay: Your rent is low. So what are your other expenses, like supplies?
Michelle: Let’s see. There is the shampoo, dyes, and other supplies. They run about $350 per month.
Jay: Have you figured out what your break-even point is?
Michelle: I’m not a numbers person!
Jay: Lots of struggling entrepreneurs have told me that – and that’s part of the reason they are struggling. Stop saying that. You shouldn’t keep telling yourself negative thoughts. It’s like someone who is trying to lose weight who keeps saying, “I can’t lose weight.” This is not calculus. It is accounting 101. You don’t have to be a C.P.A. Instead of telling yourself, “I’m not a numbers person,” tell yourself, “I can figure this out. It’s not rocket science!”
I will show you how to find the break-even point so we can figure out if you are making any money. Here is the formula:
You need to add up all of your fixed costs, which are all of your costs that are there no matter what you sell — rent, insurance, utilities, receptionist, accounting fees. You then divide that by the gross profit percentage that you make on each sale. The gross profit percentage is the percentage you actually make on sales after you pay the incremental expenses of providing the service or selling the product. For example, if you buy a widget for $1 and sell it for $2 and have no other expenses, your gross profit percentage is 50 percent.
Let’s start with the fixed costs.
Michelle: Insurance is about $1,500 per year, part-time receptionist $1,200 per month, utilities $400 per month, and accounting $75 per month.
Jay: O.K. So in round numbers, with your $1,000 per month rent and payroll taxes on the receptionist and some miscellaneous expenses, your fixed expenses are about $40,000 per year. Remember that number. It is very important. Now, what other expenses do you have that are variable — the costs associated with providing each service or selling each product?
Michelle: The only thing I can think of are the supplies that I spend about $350 per month on.
Jay: O.K. So If your sales are $15,000 per month, that is about 2 percent of your sales. And what about your merchant charges for charge cards? I’m guessing it is about 2 percent after you factor in the people who pay by cash or check. And you said you have a 50-percent split with your stylists, but you also have to pay some payroll taxes and insurance. So in round numbers, let’s figure that the 50-percent gross profit after you pay your stylists gets whittled down to about 40 percent after you subtract all of these variable expenses.
So with $40,000 in fixed costs, and a 40-percent gross profit, your break-even point is $100,000. That’s $40,000 divided by 40 percent. Think about it. If your gross revenue were $100,000, and you cleared forty cents on every dollar, you would have $40,000 — and that would pay all of your fixed expenses. At $100,000 in sales, you would break even.
Now, that means if you grossed $180,000, you should have made a profit of $32,000. Here is the math: $180,000 minus $100,000 equals $80,000 over the break-even point. That means that on every dollar you take in over $100,000, you should be making forty cents. That’s $80,000 times 40 percent, which equals $32,000.
Michelle: But I don’t have any money!
Jay: That is a whole different story. That’s about cash flow.
And we’ll talk about it tomorrow in my next post.
In yesterday’s post, I introduced Michelle VanAllsburg, who owns a salon, The Hair Co., in Grand Rapids, Mich. In debt and under stress, Ms. VanAllsburg contacted me, hoping I might be able to help her figure out how she could sell her salon. But then we ran the numbers, and much to her surprise, it looked as if she was actually making a profit. “But I don’t have any money!” she responded.
Jay: You should have made a profit of $32,000. The fact that you don’t have the cash means you have a cash flow problem, which is different than not making a profit. Just because you made $32,000 doesn’t mean it is going to be in your checking account. This is where Accounting 101 comes into play. It is the difference between your income statement and your balance sheet. The income statement shows whether you are making money. The balance sheet shows where the money and debt are. We need to find where the $32,000 is hiding. The usual places are in inventory or receivables, which you don’t have. But you do have debt. Have you paid any of it back?
Michelle: Yes. It is down about $60,000 over the last four years.
Jay: Ah ha! Are you paying any interest?
Michelle: Yes. Five percent.
Jay: Have you been paying income tax?
Michelle: I don’t know.
Jay: What does your accountant say about your business?
Michelle: She paints a very dismal picture.
Jay: Is she an accountant, or more of a bookkeeper?
Michelle: More of a bookkeeper.
Jay: Well, here is what is going on. You are making money. Last year, you probably paid down your debt about $15,000, plus you probably paid about $3,000 in interest and about $5,000 in income tax. The business made about $23,000 — if you include the interest you paid. You don’t have any money because this is the difference between profit and cash flow. But something here doesn’t make sense. If the numbers you gave me are right, you should have made about $32,000. We need to reconcile this. Check out these numbers and I’ll talk to you next week. Either way, the business should be worth enough money to sell and pay off your remaining debt.
Michelle: I hope you are right! That would be a relief.
We spoke again a few days later, and I asked Michelle if she had reviewed the numbers.
Michelle: Yes. I gave you the wrong revenue number. It was more like $150,000.
Jay: So that would account for about a $12,000 difference in profit — $30,000 times 40 percent. But you would have paid less income tax, which might make it a $10,000 difference. That means you should have made somewhere near $20,000, which is about how much the debt and interest payments were last year.
Michelle: I know! I feel much better knowing that I am making money. Now that I realize that, I am happy to continue owning the salon, because I know that I am paying off the loans from my family.
Jay: That’s interesting. So what was really stressing you out was the fact that you might not be able to pay back your family — not the stress of running the business.
Michelle: Yes. That’s true. As I told you in my e-mail, I have really good people working for me, and I have many wonderful customers that I enjoy working with.
Jay: Oh, by the way, what did your accountant have to say?
Michelle: After I talked to you, I called her to see if your numbers were right. I asked her, “Did I make any money last year?” She said, “Yes. But the profits are paying down your debt.” I asked her, “Then why were you painting such a dismal picture the last time I talked to you?” She replied, “Oh, sorry. I was having a busy week.”
Michelle is hardly alone. Many people think that they can relegate their accounting responsibilities to an outside accountant. The problem is, it has to be the right outside accountant for them, depending on their needs. And that’s the trap.
Many entrepreneurs don’t know what they need. They view accounting fees as just another expense. But like many things, you get what you pay for. If you recall, she is paying $75 a month for her bookkeeping and accounting. How much advice do you think she should be getting for $75 per month? Right. And that’s about what she got. This is not really the accountant’s fault, and this is not an uncommon situation.
It happens every day to people with more guts than money. The lesson here is that before one starts a business, it can be critical to understand basic accounting. And don’t even think of using the “I am not a numbers person” excuse. I know that’s easy for me to say — I am a numbers person – but, trust me, I have had plenty of other areas that I have struggled to learn.
Business owners do not have the luxury of pleading ignorant to one part of the business, whether it’s accounting, management or marketing. This is at the heart of why the failure rate is so high for start-ups. You seldom, if ever, hear owners say they failed because they didn’t meet the accounting, marketing or management needs of the company. Instead, they usually blame the bank, the government or the stupid partner.
Entrepreneurship, first and foremost, is about accepting responsibility. Which is why I think Michelle’s story has the potential to help a lot of people. I want to thank her for agreeing to let me publish it. She is an entrepreneur, a mother and a good sport.
Jay Goltz owns five small businesses in Chicago.
A Pay-What-You-Can Music Model
By ALLAN KOZINN
Even before the record business imploded, musicians regularly brainstormed about ways to get their work to potential listeners. But Carla Kihlstedt and Matthias Bossi were feeling more than the usual sense of urgency when they came up with a novel plan, a subscription Web site, Rabbit Rabbit Radio, to distribute new music by their latest band, Rabbit Rabbit.
“Every other conversation you had with a musician, the gist of it was: ‘The business is falling apart. What are we going to do?’ ” Ms. Kihlstedt said by phone. “I can’t tell you how many times I’ve worked really hard on a CD, for however many months or years, and then you hope the label does its job and gets it out, and that the stars align. But at a certain point, we got tired of complaining and began saying, ‘O.K., what are we going to do?’ ”
With some help from George Hurd, a composer and music administrator, they produced a blueprint for Rabbit Rabbit Radio and started the Web page in February 2012. The plan was to release a new song for subscribers on the first of every month. Along with the song, Ms. Kihlstedt and Mr. Bossi, who are married to each other, began posting video clips, slide shows and photo albums; information about the making of the track; essays on various subjects; and lists that might include links to clips by other musicians whose work they admire or notes about restaurants they have discovered on tour. Past releases can be explored in their online archives.
Subscribers pay $2 to $5 a month. (There is no difference in access; it’s a matter of paying what you can.)
“In order to work,” Mr. Bossi said, “we get so involved in preparing the material surrounding the song that it feels like we’re putting together a magazine issue every month.”
So far, 18 months into the project, Rabbit Rabbit Radio has nearly 900 subscribers. Ms. Kihlstedt, 41, and Mr. Bossi, 34, who live in Dennis, Mass., said they would be happy if their subscription list grew by 500 listeners a year.
“Our goal is to be able to count on Rabbit Rabbit Radio as part of our monthly income,” she said, noting that if you factor in Web hosting fees, site management costs and other incidentals — to say nothing of the time they put into recording the music and preparing other materials — they are barely making a profit. “But we’re taking the long view and giving it three years.”
The first subscribers were drawn from followers of Mr. Bossi and Ms. Kihlstedt’s other bands — the art-rock group Sleepytime Gorilla Museum and Causing a Tiger, an improvisatory ensemble — as well as fans of Ms. Kihlstedt’s various ensembles, which include Tin Hat and 2 Foot Yard. (Ms. Kihlstedt also has a career as a classical composer; she performed her recent song cycle, “At Night We Walk in Circles and Are Consumed by Fire,” with the International Contemporary Ensemble at Mostly Mozart on Saturday evening.)
“We spread the initial word about the site in a very grass-roots kind of way,” said Mr. Hurd, who manages the site. “We reached out to Carla and Matthias’s fan base that they’d been amassing over the past couple of decades. We also created a series of original video commercials to promote each month’s content, and asked our fans to share them far and wide.”
Rabbit Rabbit’s material is varied — often lighter in spirit and more pop than Sleepytime Gorilla Museum’s music, but sometimes driven and experimental as well. Sometimes a song reflects what they’re up to during the month they recorded it. “Merci Vielmal,” which they recorded while they were touring Europe as part of the guitarist Fred Frith’s band Cosa Brava, is about crossing linguistic and geographical boundaries, and was recorded in trains and backstage at clubs in France and Switzerland. Their most recent offering, the laconic “Before the Sun,” is a collaboration with the Chicago band Cheer-Accident.
Thymme Jones, a member of Cheer-Accident, said that his group planned to adopt the Rabbit Rabbit Radio subscription model, starting in September.
“The instant I saw what they were doing,” said Mr. Jones, who was a subscriber from the start, “the light bulb went off, and I thought, ‘We’re going to rip off this idea.’ For us, it will be an interesting way of doing things differently after 25 years of releasing physical discs. And if my math is right, we have tons of people on our mailing list.”
John Schaefer, the host of several radio shows on WNYC that focus on new music, said the subscription model struck him as a plausible way for some musicians to supplement their performing income. “If Radiohead did this,” Mr. Schaefer wrote in an e-mail, “it would go through the roof. If a local indie band did it, it might still be terrific, but I’m not sure how successful it would be. What makes it work, I think, for Carla and Matthias is that they have enough of a following to get them started and then the resulting word of mouth will hopefully sustain it.”
Ms. Kihlstedt and Mr. Bossi have looked at other models as well, including those like Kickstarter and ArtistShare, which encourage fans to provide money for musicians’ projects. Ms. Kilhstedt used Kickstarter to raise money for a song cycle, “Necessary Monsters,” and found the experience valuable, even though, she said, she went overboard with the gifts she sent to fans who contributed. (Contributors to that project, she said, were also given free subscriptions to Rabbit Rabbit Radio.) They are currently working with Fractured Atlas, an organization that helps independent artists raise money and organize their business affairs.
“We’re about to release our 20th issue,” Mr. Bossi said, pursuing his magazine analogy. “And we’ve gotten better at working fast and meeting our deadlines. This fall we’re going to spend some time getting the word out in a bigger way, and pushing it to the next level.”
raising morale by crunching the numbers . . .
By JAY GOLTZ
Here is an e-mail I recently received from a distressed business owner. Her name is Michelle VanAllsburg, and she owns a salon, The Hair Co., in Grand Rapids, Mich.:
Jay,
I stumbled upon your site, and you seem like someone that understands what I am going through. I don’t know what to do, or what steps to take. I am 32 years old, and at the age of 23, I purchased the salon I had been working at since I was 15 years old. I had been a receptionist from 15 to 19, and grew my clientele extremely fast from 19 to 23. My boss was burnt out from running the shop, and she asked me to buy it from her.
I was only 23, young, and stupid. I trusted this woman, as did my parents. I ended up not being able to get a loan at a bank, since I was so young, and I ended up borrowing a ridiculous amount of money from family. Needless to say, I got screwed, and the staff that loved me didn’t want me for a boss because I was so young. I basically had a walk out, and it took me four years to get a great group of people, but I am now burnt out. …
I have now owned it almost eight years, have made no profit, and have a family that I want to focus on. How on Earth does one try to sell a business that doesn’t really profit but just pays the bills and has some money left over?? I have a great staff of “nice” people, but they just are not busy enough. I have given them all my clientele so they are busier and don’t leave. My husband supports us, and I only work two days a week. I only work two days so that my parents can watch the kids for free, but they can’t do any more days, and I don’t want to pay for child care.
I am stressed out with all this debt I owe my family, and I just want OUT. I know I won’t be able to sell it for what I owe, but my accountant is getting numbers together for me so I at least know where to start. I am just done trying to build something that is not building fast enough.
Is there any advice you can give me??
Stressed out mother of two little ones,
– Michelle VanAllsburg HELP
I always feel bad for entrepreneurs who follow their passion and then find themselves in a big dark hole. And in this case I appreciated Ms. VanAllsburg’s predicament and her brutally honest perspective. From the few details in the e-mail, I was confident that I could at least give her some moral support — and at best maybe some suggestions. I know how lonely it can feel to be an entrepreneur. I called her and got right to the point. What follows is a summary of the conversation.
Jay: First of all, you said you got taken advantage of in the sale. You worked at the salon for years, and the owner was like a mom to you. How do you figure you got taken advantage of?
Michelle: The salon was doing about $200,000 per year, and I paid her $120,000. It was making about $40,000 per year. I paid too much.
Jay: I don’t know why you are under the impression that she took advantage of you. It sounds like a fair price. And even if it wasn’t, get over it. She asked for the price, and you paid it. You were not cheated. It is waste of thought and energy.
Michelle: I already have. I just want to get out from under this.
Jay: Who do you owe money to?
Michelle: My parents and my in-laws. Don’t get me wrong — they have been very nice about it. But my parents took a home-equity loan on their house. It makes me very anxious just thinking about it.
Jay: What are the numbers today?
Michelle: I’m grossing about $180,000 per year. My rent is pretty low, about $1,000 per month. And I do a 50-percent split with the hair stylists. I’m not making any money, and my husband kids me that I am working for free.
Jay: Your rent is low. So what are your other expenses, like supplies?
Michelle: Let’s see. There is the shampoo, dyes, and other supplies. They run about $350 per month.
Jay: Have you figured out what your break-even point is?
Michelle: I’m not a numbers person!
Jay: Lots of struggling entrepreneurs have told me that – and that’s part of the reason they are struggling. Stop saying that. You shouldn’t keep telling yourself negative thoughts. It’s like someone who is trying to lose weight who keeps saying, “I can’t lose weight.” This is not calculus. It is accounting 101. You don’t have to be a C.P.A. Instead of telling yourself, “I’m not a numbers person,” tell yourself, “I can figure this out. It’s not rocket science!”
I will show you how to find the break-even point so we can figure out if you are making any money. Here is the formula:
You need to add up all of your fixed costs, which are all of your costs that are there no matter what you sell — rent, insurance, utilities, receptionist, accounting fees. You then divide that by the gross profit percentage that you make on each sale. The gross profit percentage is the percentage you actually make on sales after you pay the incremental expenses of providing the service or selling the product. For example, if you buy a widget for $1 and sell it for $2 and have no other expenses, your gross profit percentage is 50 percent.
Let’s start with the fixed costs.
Michelle: Insurance is about $1,500 per year, part-time receptionist $1,200 per month, utilities $400 per month, and accounting $75 per month.
Jay: O.K. So in round numbers, with your $1,000 per month rent and payroll taxes on the receptionist and some miscellaneous expenses, your fixed expenses are about $40,000 per year. Remember that number. It is very important. Now, what other expenses do you have that are variable — the costs associated with providing each service or selling each product?
Michelle: The only thing I can think of are the supplies that I spend about $350 per month on.
Jay: O.K. So If your sales are $15,000 per month, that is about 2 percent of your sales. And what about your merchant charges for charge cards? I’m guessing it is about 2 percent after you factor in the people who pay by cash or check. And you said you have a 50-percent split with your stylists, but you also have to pay some payroll taxes and insurance. So in round numbers, let’s figure that the 50-percent gross profit after you pay your stylists gets whittled down to about 40 percent after you subtract all of these variable expenses.
So with $40,000 in fixed costs, and a 40-percent gross profit, your break-even point is $100,000. That’s $40,000 divided by 40 percent. Think about it. If your gross revenue were $100,000, and you cleared forty cents on every dollar, you would have $40,000 — and that would pay all of your fixed expenses. At $100,000 in sales, you would break even.
Now, that means if you grossed $180,000, you should have made a profit of $32,000. Here is the math: $180,000 minus $100,000 equals $80,000 over the break-even point. That means that on every dollar you take in over $100,000, you should be making forty cents. That’s $80,000 times 40 percent, which equals $32,000.
Michelle: But I don’t have any money!
Jay: That is a whole different story. That’s about cash flow.
And we’ll talk about it tomorrow in my next post.
In yesterday’s post, I introduced Michelle VanAllsburg, who owns a salon, The Hair Co., in Grand Rapids, Mich. In debt and under stress, Ms. VanAllsburg contacted me, hoping I might be able to help her figure out how she could sell her salon. But then we ran the numbers, and much to her surprise, it looked as if she was actually making a profit. “But I don’t have any money!” she responded.
Jay: You should have made a profit of $32,000. The fact that you don’t have the cash means you have a cash flow problem, which is different than not making a profit. Just because you made $32,000 doesn’t mean it is going to be in your checking account. This is where Accounting 101 comes into play. It is the difference between your income statement and your balance sheet. The income statement shows whether you are making money. The balance sheet shows where the money and debt are. We need to find where the $32,000 is hiding. The usual places are in inventory or receivables, which you don’t have. But you do have debt. Have you paid any of it back?
Michelle: Yes. It is down about $60,000 over the last four years.
Jay: Ah ha! Are you paying any interest?
Michelle: Yes. Five percent.
Jay: Have you been paying income tax?
Michelle: I don’t know.
Jay: What does your accountant say about your business?
Michelle: She paints a very dismal picture.
Jay: Is she an accountant, or more of a bookkeeper?
Michelle: More of a bookkeeper.
Jay: Well, here is what is going on. You are making money. Last year, you probably paid down your debt about $15,000, plus you probably paid about $3,000 in interest and about $5,000 in income tax. The business made about $23,000 — if you include the interest you paid. You don’t have any money because this is the difference between profit and cash flow. But something here doesn’t make sense. If the numbers you gave me are right, you should have made about $32,000. We need to reconcile this. Check out these numbers and I’ll talk to you next week. Either way, the business should be worth enough money to sell and pay off your remaining debt.
Michelle: I hope you are right! That would be a relief.
We spoke again a few days later, and I asked Michelle if she had reviewed the numbers.
Michelle: Yes. I gave you the wrong revenue number. It was more like $150,000.
Jay: So that would account for about a $12,000 difference in profit — $30,000 times 40 percent. But you would have paid less income tax, which might make it a $10,000 difference. That means you should have made somewhere near $20,000, which is about how much the debt and interest payments were last year.
Michelle: I know! I feel much better knowing that I am making money. Now that I realize that, I am happy to continue owning the salon, because I know that I am paying off the loans from my family.
Jay: That’s interesting. So what was really stressing you out was the fact that you might not be able to pay back your family — not the stress of running the business.
Michelle: Yes. That’s true. As I told you in my e-mail, I have really good people working for me, and I have many wonderful customers that I enjoy working with.
Jay: Oh, by the way, what did your accountant have to say?
Michelle: After I talked to you, I called her to see if your numbers were right. I asked her, “Did I make any money last year?” She said, “Yes. But the profits are paying down your debt.” I asked her, “Then why were you painting such a dismal picture the last time I talked to you?” She replied, “Oh, sorry. I was having a busy week.”
Michelle is hardly alone. Many people think that they can relegate their accounting responsibilities to an outside accountant. The problem is, it has to be the right outside accountant for them, depending on their needs. And that’s the trap.
Many entrepreneurs don’t know what they need. They view accounting fees as just another expense. But like many things, you get what you pay for. If you recall, she is paying $75 a month for her bookkeeping and accounting. How much advice do you think she should be getting for $75 per month? Right. And that’s about what she got. This is not really the accountant’s fault, and this is not an uncommon situation.
It happens every day to people with more guts than money. The lesson here is that before one starts a business, it can be critical to understand basic accounting. And don’t even think of using the “I am not a numbers person” excuse. I know that’s easy for me to say — I am a numbers person – but, trust me, I have had plenty of other areas that I have struggled to learn.
Business owners do not have the luxury of pleading ignorant to one part of the business, whether it’s accounting, management or marketing. This is at the heart of why the failure rate is so high for start-ups. You seldom, if ever, hear owners say they failed because they didn’t meet the accounting, marketing or management needs of the company. Instead, they usually blame the bank, the government or the stupid partner.
Entrepreneurship, first and foremost, is about accepting responsibility. Which is why I think Michelle’s story has the potential to help a lot of people. I want to thank her for agreeing to let me publish it. She is an entrepreneur, a mother and a good sport.
Jay Goltz owns five small businesses in Chicago.
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