knowledgeable clients are better clients.
by ed mendlowitz
call me before you do anything: the art of accounting
one of the best tools to evaluate a business and get a quick handle on the knowledge of the owner or manager is the break-even analysis.
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break-even analysis is a simple calculation that tells how much sales are needed to break even, and how much will be lost or earned when sales fall short of that amount or exceed it. a key part of this is to determine the “product lines” a business has and its direct cost structure.
a simple explanation is to imagine a bar and restaurant. there are two basic product lines – liquor and food. generally, the direct costs for the bar are around 20 percent and the food around 35 percent. if bar sales are 40 percent of the total and food 60 percent, we can then get a weighted average of sales. this information can be applied to almost any business.
now, how i get this information is very insightful to me. i get it over lunch with my client – primarily new clients – and write it on a napkin. i believe most owners or managers should understand and have a handle on the product lines and the approximate direct costs. most do, but some do not.
i am appalled when clients do not have a clue about this information. this tells me a lot about them and how the business is being managed – it isn’t. i then draw up a proposal to provide a methodology for helping them get a better grasp and establish controls.
for those who know, i test what they told me and then complete the b/e analysis for them. it then becomes one of their management tools. the more knowledgeable the client, the better it is to work with them.