June 8, 2011

Starting a business can be easy. Earning a profit with your business—not so much. While there are many ways to grow a business— from bootstrapping it with credit cards to taking on investment capital—the goal, at some point, should be to start earning a profit. To get there, however, a business needs to first get its cash flow under control, specifically by taking in more cash than you pay out on a regular basis. That’s called breaking even. The companies that find ways to get to that point quickly are often the same ones who tend to survive over the long haul since the business can essentially pay for itself. What follows are stories and advice from entrepreneurs who found ways to get to break-even and beyond.

Case study 1: Take business where you can get it

After having her second child two years ago, Phyllis Cheung decided to quit her job as a marketing consultant for the wedding industry and start her own business: My Wedding Concierge, a wedding blog search engine. Working with her husband, Philip, a programmer who kept his day job, Cheung added iPhone and iPad apps, which she sold through the iTunes store. But, even though Cheung kept her costs to a minimum, she was still spending $2,500 a month on things like server costs. Three months after starting the business, revenues were growing, but she wasn’t yet breaking even. That’s when she decided to start building iPhone apps for other wedding vendors as a way to get profitable. “We were able to bring in revenue at the risk of not developing our core technology at the pace that we wanted to build it at,” says Cheung, who lives in San Diego. “I think that this works well for software companies because we are versatile and can adapt easily, especially when it comes to building apps because they are so hot right now. It’s great to know that if we need cash, we know how we can generate it right away.”

Case study 2: Don’t get ahead of yourself

Patrick Sweeney was trying to tap into what he thought was a burgeoning market when he founded Odin RFID, which develops an operating system for radio-frequency identification tags. Sweeney, a former Olympic rower, hired two employees in early 2003 to get his Ashburn, Virginia-based company started. That meant that he was immediately facing a $10,000-a-month burn rate, most of which was payroll. Fortunately, Sweeney landed his first big client—Colgate-Palmolive—just six months later, which brought his cash flow into the black. But rather than grow blindly from there, Sweeney stuck to forecasting one to three months ahead to know how many new employees he could bring on and how much he could invest in expansion without the company’s costs outstripping its revenues. “Mostly what we did was extend our forecasting by the amount of cash we were piling in the bank,” says Sweeney. “So we tried to break even for one week, then one month, and when we eventually got to break even for months at a time, we could forecast our variable costs like hiring and marketing expenditures onto our fixed costs and do a rolling forecast that continues to grow out as we grow. You have to understand the scale you’re at and plan accordingly from there.” For what it’s worth, Odin has continued to grow, profitably, ever since.

Case study 3: Get your money in advance

Mike Scanlin was 15 when his father, a stockbroker, taught him how to make what’s known as a “covered call” on a stock, where you sell a call option on a stock you own. Today, he now runs Born to Sell, a subscription service for investors dedicated to helping them make the most money from their own covered-call transactions. Scanlin had been a venture capitalist at Battery Ventures in Silicon Valley for seven years before deciding that he wanted to start a business of his own in 2009. Despite many offers from his friends in the industry to fund his startup, Scanlin was determined to bootstrap it himself. Scanlin spent 18 months developing his site before its launch in July 2010. With his burn rate running at about $10,000 a month, Scanlin wanted to find a way to get to break-even as quickly as possible. That’s when he decided to offer a discount to customers willing to prepay for their subscription. “Initially it was only available month-to-month, but then I thought ‘Why not give a discount to people who will pre-pay multiple months in advance?’” says Scanlin. “So we tried it and the response was amazing.” Scanlin offered a 17-percent discount if users would pre-pay three months in advance, and a 30-percent discount if they pre-paid a year in advance. To his amazement, about one-third of the people choose three-month subscriptions and another one-third choose 12-month subscriptions (the others remained on a monthly plan). That meant that two-thirds of his customers were paying him upfront, which helped make Scanlin’s business cash-flow positive in its third month after launch.

Read 6 Strategies For Breaking Even (Part II)

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