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Starting a small business Part 3

November 24, 2012

Thank you virginiaplantation for liking my previous posts.  You have inspired me to continue.  I hope the posts either help people fix their businesses or prevent them from losing their savings while starting one.

 

Is failing to plan really planning to fail?  YES!  Without a business plan or tons of blind luck, your business will fail.  Would you drive to a new place without looking at a map or using GPS?  Did you jut say yes?  Really, you’ve just heard of a new Tamil restaurant opening in a town that you’ve never been to before and you would blindly jump into your Prius and head for it?  Be honest.  You would call up iPhone maps and hope that they have the correct directions.

Starting and running a business works the same way.  You need a plan or budget to guide you.  Not only does it guide during the year, it also lets you measure your success or failure and correct the course along the way.  Building a business plan before starting a business will even let you determine profitability before spending any of your hard earned capital.

I briefly had a client that opened a Christmas themed store.  She wanted to sell all kinds of Christmas ornaments and decorations year-round.  She plopped down a bunch of money on first and last month’s rent and an opening inventory of balls, snow globes, Santas and so on.  She hired my firm after opening up and spending all this money.  She didn’t have a plan.  She did drain all the money out of her 401k and second mortgage to start the store because banks wouldn’t lend her any money.  That should have been her first hint.  I can’t believe that the local banks didn’t recommend that she work with an accountant or other resources before starting the store.

I only met her once and gave her a hypothetical.  I asked her how many snow globes would she need to sell each month to just pay rent –  not utilities, property taxes, or any profit.  I just wanted to demonstrate the effort required for her to be able to buy more snow globes and keep the doors open.  She didn’t know.  She would sell the globes for $10 and they cost her $5 each so her Gross Profit per globe was $5.  Her monthly rent was $1,500.  She was open 5 days per week for about 8 hours each day.  5 days a week is roughly 20 days per month.  So, $1,500/$5 equals 300 globes.  She would need to sell 300 globes every month to just pay rent and buy more globes, at current costs.  Divide the 300 globes by 20 days and she would have to sell 15 globes each day of each month to pay rent.  Getting more anal, divide the 15 globes by 8 hours and she needed to sell 2 globes every single hour of every single day to pay rent.

I asked her if she could identify a list of people who would come in and buy 2 globes each hour.  Her eyes glazed.  I may have thrown too many numbers at her too quickly.  Later, she asked to only work with one of my assistants.  She fired us after the first quarter of work and closed down two months later.  She never payed for the work we did.  She probably lost over $20,000 so I didn’t really try to collect the money she owed me.

You can find business plan templates all over the web.  Just type business plan template into Google.  I don’t necessarily endorse any specific one.  I used to teach the Fast Trac methodology.  You can find their take at entrepreneurship.org.  Regardless of the template, you should use one that breaks down into how many customers/sales you need each month just to break even.

Be wary of glad handling mooks that “help” with creating a business plan, tell you to “follow your dreams” and never give any negative feedback.  (You’ll find them at places like score.org.)  You should really find a misanthropic curmudgeon who shoots your plan and dream through with enough holes to render it transparent.  Skepticism will protect your savings and your sanity.  Trust me.

 

 

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From → Business

One Comment
  1. This was a good read

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