Ideal break-even point for Management Consulting Startup?
We are a management consulting startup organization and we are in the process of identifying clients who could use our Training and Project Management Expertise. It has been 5 months from our initiation and unfortunately, we've made no headway. I'd like to understand what is the point or duration that your startup is expected to hit break-even?
What industry are you targeting with your Project Management service? Or is the service applicable to most generic businesses?
Break even is something you determine prior to actually opening your doors, it in essence tells you how much you need to make everyday in order to keep your doors open. Your breakeven should take into account all of your operating expenses, your cost of sales, and project cost less how much you are charging for a project. For you to make headway you need to be charging more than you are spending.
I think you should wait a little longer. It is not easy starts a successful business. I just a question for you: Is that before you start you start doing surveys? If yes then please be patient. Otherwise you'd be looking for customers even before you start. But toujoujours as we are in entrepreneurship you can review your approach strategy. Reviewed Concepte your and you're sure to find the new clientelle but also advice not to abandon your idea of departure.
How much money do you have before you need to earn a salary? How much do you have saved? Do you have a house you are willing to risk / borrow against?
These are the questions I would ask. I would also make sure that you pay taxes as you receive client payments. I have seen a lot of people get caught here. Don't make that mistake. You can't run from city hall.
I started my company with clients. My break even point was the net salary I needed, plus personal income taxes, plus start up costs. As I've grown the company the formula has increased to include accountancy, legal, web, equipment, etc. I break costs out on a monthly basis so I can see how we are doing as a whole.
Too many variables for when it is "expected". You have to balance having resources on hand to be credible in the first place vs. paying people to do no work. At least make sure you use those people to generate lots of high-quality artifacts that can serve as a differentiator in the future. You should recognize that you are in a very, very commoditized marketplace; you're either going to need to compete on price (and that overhead isn't going to help) or you're going to have to offer something quite unique. Unless you have really deep pockets -- sometimes that is part of the mystique you are selling -- I'd be thinking about minimal staff, just what you need to sell some work, ramping up initially with individual contractors (start building those relationships now).
What is Gross Margin?
Put simply, gross margin is the money left after you have covered all the variable (not fixed) costs associated with the sale of a product or service (such as wages, materials, etc.). But gross margin is so much more than that; it is a measure of your production efficiencies and it determines your break even point. It is a key calculation as you assess your startup business risk and profitability.
To understand the impact gross margin has on profitability, consider this example:
A startup has $100,000 in fixed overhead costs with a projected gross margin of 50 percent of sales. To cover its overhead and break even, the startup would need to reach sales of $200,000.
However, with the help of cheaper suppliers and materials (or a higher unit price) gross margins may increase to 55 percent of sales, meaning the startup would need to sell less products or services before breaking even.
The Consequences of Not Knowing your Gross Margin
Understanding and monitoring gross margins can also help business owners avoid pricing problems, losing money on sales, and ultimately stay in business. If you don’t know what your gross margin is, then making sense of anomalies in your income statements becomes tricky. Why?
Many businesses that appear to be thriving often fail because their prices are too low or their costs are too high and they can’t make a profit. Establishing a low price strategy is tempting, especially when dealing with cut-throat competition – however, it’s rarely sustainable and it can be tough to increase prices later, even with a loyal customer base. Using gross margin calculations and other factors (discussed in more detail below) as you plan your business can help you avoid pricing mistakes before it’s too late.
Cost control is another area that can trip up small business owners. It’s surprisingly easy for staff to ignore cost control procedures, which can quickly erode your margins. For example, if higher cost materials have made their way into your production process (and this could be something as simple as a chef using a higher quality food product or making bigger sandwiches in the kitchen than had been budgeted for) – then you have a problem.
Knowing what your gross margin is on every product throughout the life cycle of your business and acting on any variations you detect can help you identify these problems before it’s too late.
How to Calculate Your Gross Margin
Calculating gross margin is easy if you’ve been in business long enough to get some recordkeeping under your belt, but for startups the process is a little more complex.
1) Calculating Gross Margin if You’ve Been in Business a While - Start by looking at historical data over a business quarter or year and identifying your company’s total revenue for this period and the costs of goods sold (raw materials and labor). Then follow this formula:
a) Subtract the costs of goods sold from the total revenue. In our example, subtract $100,000 from $200,000 to get $100,000.
b) Then divide the result from step one ($100,000) by the revenue ($200,000) to calculate gross margin = 0.5 or 50 percent.
You can also find a variety of online calculators to help you make this calculation.
2) Calculating Gross Margin as a Startup – If you don’t have any income reports to go by, calculating your potential gross margins involves some research. Consider the following:
What is the competition doing? If you can, try to find out the gross margins of your competitors or industry averages to benchmark where yours should be. Even if their financial data is not in the public domain, their pricing and your understanding of costs will give you a rough estimate as to where your margins should be.
Assess your costs and explore ways you can decrease these over time. This should give you an early indication of the profitability of your business. Remember that gross margins change over time through reduced costs and increased efficiencies.
Hi Jitin, Any business takes time in becoming viable let alone a success.
Think about the music industry, sometimes it take 10 + years to become an overnight success.
What I would be doing to to do a review of your competitors, and see how long they have been in business, I'm sure that you should be able to find similar companies at various stages of there corporate life.
All of them will hep you in obtaining a sketch of what your industry look like at their various stages. This can help to provide a rough outline, in regards to what your company could look like in x number of years.
While you are at, it you should also map out a SWAT analysis on your competitors, if not a true swat then a perceived SWAT.
And then marry your findings against your companies SWAT.
From this you may find out what not to do, and what to do. You may also be able to find "gaps" which you may like to fill, and thus present yourself "Unique" Looking for things that you can incorporate as a sustainable advantage.
Such things will help you to stand out from the crowd.
My thinking is if you have not made much headway, you need to look at what you are doing. Along with How and to who.
Are you doing news things, looking for specific targets, working with what you have as a base, and then seeking like / similar companies / industries.
Or have you been doing the same thing one month after the next.
I can say that with any company the biggest hurdle is getting past the 2nd year. What I have found with many start up companies, is they fall over because they have not survived a full tax year. and they do not have enough diversity in clients to maintain an income stream.
I am not sure whether you have identified your expertise and market need.
If you know your target client, first you should know their inadequacies in the system and then you design your service offer. This way you will be able to create a space for yourself amongst the clients.
Based upon my experience and that of many of my peers, it will take 2 years before you know that you have a feasible business. Revenue will need to flow long before that but it may not be stable until you have developed a track record on which to build. Good luck.
Management consulting is a dynamic area and it is particularly tough for a startup without proven expertise. Usually, the first clients of such a startup come from the previous business of the founders, based entirely on personal contacts. That is, imagine you need a training and amongst the candidates there is a totally unknown company, never existed before. Would you choose it? I don't think so.
A good starting point would be to try to enter as a subcontractor to some of the already established companies. In that way you enter the market and have the opportunities to create your own clientele.
Of course, things are really specific to any particular situation, so it would be inappropriate to give you detailed advice. However, I find it really strange that you offer project management and you can't find clients. This is a really fast growing area of business consultancy and the fact, that you lack clients means that there is something wrong with your overall business strategy. For instance, I know a UK company which is dealing predominantly with project management and which has extended organically from 3,000 people to 40,000 people for the last two years. They are now providing services on the entire EU common market.
Really a question that needs constant review of your existing pipeline - Consulting Pipeline should have a minimum ratio of 5:1 in relation to conversion to revenue so there needs to be a healthy pipeline of opportunities to convert - A good pipeline helps to confirm that the services your are offering are in demand and if that is okay then you need to focus on the conversion process eg are you closing the deals in a timely manner. In regard to timing it is more about seeing a positive trend in your critical business parameters and the ability to gain the confidence of your market segment. (as always this is offered in a vacuum of critical data).
The ideal break even is as close to inception as possible!!!...however, I agree with Barbara, no one size fits all, the more fundamental problem behind this is actually our prospective clients, whilst we as clients understand the need for SME's to improve, not many small business's actually think they need to and prefer to bumble along doing the same as they did yesterday and last week and last year, I think maybe you need to re-evaluate what your customer type is, having a more surgical approach will mean you spend less time trying to 'convince' clients and more time pitching to those that truly are interested in improvement...hope this helps..
That is a very complicated question, and depends upon a lot more factors than can be covered in a forum like this.
You say you have been working to identify clients who can use your expertise. I assume you mean you have actually been trying to find someone who will hire your group - not the same as finding someone who can use your services.
The question you should be asking is why you haven't gotten any takers. It is most likely one of two issues: you are either identifying the wrong client base, or there is a problem in your sales process.
In order to determine the issue, you have to examine the number of people you've contacted, level of response you've received, and a number of other factors.
To address your original question, how long you guys can wait it out depends upon your capitalization and your confidence in your market. For most consultancies, the principals have clients at the ready before they begin (either past employers, freelance work, or someone who asked for their help). This initial base yields referrals, testimonials, and case studies - all of which feed into the long-range sales process.
Pretty easy answer ...more than just an office person. Bring on an assistant or junior who takes work away from you and then you concentrate on another new client. If you hire well, hopefully that person is so good that they take more work away from you and that they get client exposure.
There are some great ideas offered to you. When I started mine it took four months then two months to finalize the contract. After that it gets easier. The concerning thing is it could take more months or a year to land a contract in a saturated market. I did work for someone else at the time to subsidize my business and my personal needs. The first contract is tough because you need to have a win win but make sure it fairly covers your services. Once it is done it is tough to renegotiate you loose confidence if the deal int right.
Now I can set up deals knowing what my services are and have proof of successful services to back it up. There are so many training company's out there you need to prove you are different with big results to pull away from the pack. Best of success to you. If you put the effort and commitment to your dream it will happen.
Did you do a break-even analysis before you started? If you had you would have identified the number of customers you needed to use your consulting services and at what fees each month to allow you to break-even. This would have alerted you early on as to whether or not your plan would succeed. Typically start-up's lose money during the first year of operations which is why you need to do a break-even that should be part of your business plan so that you can insure that you have enough money to survive until the company breaks even. Do you have a business plan?
I agree with Barbara Goldberg. The first year of any startup can be a bit tricky depending on the nature of the business, the industry and the market (or type of clientele available).
Breaking-even will depend on some factors like pricing vis-a-vis overheads and number of clients. So let me break it down this way:
Pricing: It is the toughest areas to get right for any startup. So try bidding on a project basis so that you can build in your overhead costs. Also, try multiple pricing options to prospects, based on the scope of the work to be done.
Costing: As much as possible, try to spend no overheads before its time. This may help keeping the little revenue you may be raking in.
Market: As a startup you may have to try and balance a number of clients (maybe 2) at a time until you can figure out the balance between the pricing and costs. But you must take this into account as you negotiate the timing for your contracts.
That point is the point at which you can no longer support the effort. I was fortunate when I started my consulting firm, to have a client who pre-paid a year's consulting fees (a tax advantage for him and a godsend for me).
That allowed me to take my time accepting new clients without the pressure of needing to accept business that might not be good for my future.
Find a way to earn the money that will allow you to keep plugging away at the startup. If you don't make it, rethink the viability of your product, make changes, and save enough cash for your next try. Good luck.
Define your target market and ideal client. Do not shotgun out to every one, everywhere.
Determine the problems of your your target market and your service will help solve them.
Develop a compelling marketing message using the Marketing equation of Interrupt, Engage, Educate and Offer.
Develop a marketing plan using the target market and your compelling message.
To be honest I don't think there is a one size fits all answer. What works for one business may not for another. What you need to constantly do is review what you are already doing and identify what is working vs. what is not working for you. You need to constantly be willing to pivot until you get that sweet spot you are looking to attain.