The Power of a Steering Committee

Having a Steering Committee or some type of Advisory Board within a company can be vital in the development of operational productivity and strategic planning.  This team acts as somewhat of a focus group whose main goal is to create new directions for the company that haven’t been previously explored.  It doesn’t matter how big or small a company is; a team of people have a better chance at devising more constructive plans than one individual alone.

In many small companies, the business owner leads the way in creativity, direction and innovation.  However, even the most knowledgeable entrepreneurs recognize that they alone can’t get their company to the top.  Sometimes a business owner is too vested in the company and can benefit from the point of view of others who may be able to view certain situations from a different perspective.

A Steering Committee is made up of a small group of individuals who are interested in brainstorming ideas and troubleshooting problems in an effort to make the company better in some way. Sometimes it’s more beneficial to have representatives from different levels of the company.  A committee comprised of only management may not accurately represent the company as a whole.

As with any committee, a Steering Committee should have a leader who facilitates the group and provides some level of direction.  As a whole, the group should decide on various topics to brainstorm and set goals to accomplish.  Regular meetings should occur in an effort to maintain continuity.  Someone should be appointed to document the minutes of each meeting so that valuable discussions are not forgotten and the meetings have some sense of organization.

If your company is so small that there are not enough employees to compile an effective team, you can try to enlist volunteers outside of the company who may be willing to help.  Either way, there are few people who would deny that a group of minds working together toward the same goal can produce better results than one person alone.  Spending just one hour per week or one hour per month for this team to focus on making the company a better place can breed a whole host of ideas that would never have been developed had it not been for the implementation of a Steering Committee.

Try this at your company and see how much progress can come from dedicating a team of people to making your company better in every way.  It’s a small investment in time that could create very powerful and effective changes.

Determining a Payback Period

A payback period is the amount of time in which it will take a company to recover or pay back an investment.  This could pertain to the initial investment that a business owner puts toward a startup, contributed by a venture capital firm, a loan from a bank or the cost of launching a particular project.  For a startup, it’s important to know the payback period because technically, the company is not profitable until that point.  For a lender, it’s important to know how long it will take before they see a return on their investment. 

The payback period can be calculated by dividing the cost of the project by the annual cash inflow.  For example, if it will cost $100,000 to launch a project that is expected to generate $25,000 per year, the payback period is 4 years.

Sometimes you may have to estimate the income generated by the project, which therefore means your payback period will also be estimated.  Nevertheless, investors/lenders want to know this information so it’s good to include it in a business plan.  It’s also good information for the company in terms of managing expectations for the launch of a new division, product or startup as well as managing the company’s budget. 

This type of analysis can be very useful to a company that is making multiple investments in different areas.  Expenditures can get confusing when there’s a lot going on and determining the payback period of a particular investment helps to organize the flow of cash.  From a decision-making standpoint, determining the payback period could make the difference between proceeding with a plan or not, particularly if the payback period is too long. 

Even though the payback period doesn’t take into consideration the time value of money, it helps to measure risk which is an issue that all investors and entrepreneurs grapple with before making a decision to move forward with a business venture or project.  In its simplest form, determining a payback period is figuring out how long it will take to breakout even.  Every business owner wants to know when their company will become self-supporting.

Conducting a Break Even Analysis: Know Your Bottom Line

If you own a business but haven’t done a break-even analysis, then you have no idea how much of a profit you are making, nor do you know where your bottom line is.  It’s sort of like driving a car with a broken gas gauge.  A break-even analysis is a process in determining the point at which a company begins to make a profit, despite its operating expenses.  The break-even point is the point in which sales revenue is equal to the total cost of a product or service.  Beyond this point is profit, under it is loss.

The first step in doing a break-even analysis is determining your company’s fixed and variable expenses.  Some expenses may be both fixed and variable.  For example, sales compensation can be a combination of a base salary plus commission.  Once you’ve determined all of your expenses, you’ll have some calculating to do.  Think of it as a mathematical equation.  Take your fixed expenses then divide that number by your selling price (per unit) and then minus your variable expenses.  If you’re having difficulty getting an exact number, don’t worry.  There are many factors that can influence a break-even analysis. The goal is to get as close to the actual number as possible so you have a realistic estimate.

An important term to know is Contribution Margin.  This is the product or service revenue minus the variable expense per unit.  Therefore, the break-even point is the total fixed costs divided by the contribution margin per unit.

If you can’t figure your variable expenses because they’re too unpredictable, just take your total expenses for a given period of time, such as one year, and divide that number by the total units sold for that same period of time.  For example, if your company sells skin care products and your annual operating expenses (rent, salaries, packaging, raw materials, utilities, legal fees, etc.) cost $1 million and you sold 250,000 tubes of lotion in a year, your break-even point is $4 per tube.  If you sell your product for $5 per tube, your profit is $1 per unit or $250,000 for that year.

If your company provides a service, such as a medical office, and your annual operating expenses are $1 million, you would have to provide 10,000 treatment sessions at $100 just to breakout even.  Better raise your fee to $150.

It’s important to perform regular break-even analyses over the course of time because, as your expenses change, so will your break-even point.  Don’t mistake your break-even point with your payback period which is the time it takes to recover an investment.  That is also an important figure to calculate but for a different reason.  If you are writing a business plan, it’s a good idea to include both of these calculations as they are not only important to investors (if you are seeking venture capital) but also good to understand the challenges associated with your startup or running your existing business.

For more information on how to perform a break-even analysis, please contact Ashlar Consulting Corporation at 305-849-9399 or visit www.AshlarConsultingCorp.com.