We Will Figure It Out…When We Get There

Summary

One of my new clients is launching a brand-new business. This is the first time she has owned a retail business, and the setup of the operations is expensive. The building requires extensive renovations, and the basic equipment will be another huge investment. Then there are the product and staffing costs. For this client, the time from the investment of substantial funds to opening day will be six months, if everything goes perfectly, but it is more likely to be nine months. I have been encouraging her to spend time developing a business plan that includes an understanding of the day-to-day costs of being open, such as inventory costs, labor costs, and the number of clients that can be served per hour, etc. She doesn’t want to “waste time” (her words) on a business plan. She is confident she can figure it out when she gets the doors open.

Figure It Out Now

I’ve been doing some rough calculations on my own. Her daily operating costs, with a planned staff of 8 people and the product offering she has described, will be $960 for labor, $ 1,440 for inventory, plus the fixed overhead associated with rent, utilities, insurance, etc., which is another $530. Every day she is open will cost her $2930. This doesn’t include the cost of her nine-month investment ($ 1,815 per day), nor does it include marketing, promotions, and other expenses, which add up to $100 per day. Her total daily expenses are $7810.

Working with $ 7,810 as our baseline, let’s add 10% for items she hasn’t considered: permits, sales and use tax, property taxes, and so on. The number for breaking even (just covering costs) is now $8591 a day. That’s a pretty big number, isn’t it? How many customers does she need? Based on her plan for an average sale of $15, she will need 573 customers each day to cover these costs. Her store capacity is 20 people. How many hours will she need to be open? Serving 20 people per hour, she needs to be open 28.6 hours a day. You get the point: She is doomed before she begins, which could be anticipated if she devotes time to creating a business plan.

Business Plans: Figure It Out on Paper

In the planning phase, she has options on how to fix it. She has the option to devote more space to customers (increased capacity) and less to office space. She can simplify the product offering (decreasing product costs), with a streamlined upfit of the storefront (reduced investment costs and quicker opening), and the numbers begin to change. Also, with a simplified product offering, staffing changes, and lower labor costs will be incurred. (Potential labor cost-savings include less time on inventory ordering and handling by reducing the number of inventory items and less complex products and services, enabling more to be done by fewer people.)

A business plan documents your assumptions and enables you to “do the math” for those assumptions. It is easier and less costly to work through your operating and financial assumptions on paper before you “get there.” This short scenario didn’t even include profits or a salary for my client. It didn’t account for all the real costs of being in business, such as seasonal fluctuations, damaged products, and sale prices.

Scenarios Cost Nothing, Mistakes Cost A Lot

Working through various operating decisions and translating them into financial realities can help you maximize your business success. This is true for both a business that has yet to open its doors and an existing business that wants to grow, improve profits, or expand into new markets.

A business plan is not a meaningless exercise. It is not just about obtaining a written document (although having a written plan can help communicate your vision and secure funding). It is about the process of thinking through your decisions and assumptions.

At Least Do This

I am hopeful that when the client reviews my rough estimates of the realities of her business assumptions, she will dedicate some time to developing a business plan and make some tough choices. The reality is that it is costly to figure things out after the fact, and you have fewer options for your business. Even if you don’t write out a detailed plan, you should at least do the following minimum steps.

Document your business assumptions, including investment space and equipment, hours of operation, staffing, wages and salaries, benefits, taxes, insurance, rent, and other relevant details.
Translate those expenses and investments into per-unit, per-hour, and/or per-customer costs.
Determine the average dollar value of sales.
Calculate the number of sales needed to cover your costs. (Breakeven)
Evaluate your capacity to achieve that sales volume.
Set a profit goal and translate it into additional sales volumes.
Revise your operating and financial assumptions and recalculate your numbers. Repeat until you have a viable business plan.