I Want to Be in Business!

Recently I met a business owner who, upon finding out that I was a business consultant, wanted to meet and discuss how their business could benefit from working with me. The objective of the business was to produce a specialty item for sale in grocery stores. This was a home manufactured product and family members were the production and delivery team.

The business had been operating for a year and when I asked if it was profitable I got a suspicious answer. After some wrangling it was revealed that another family member (brother-in-law) did the books for the business but no monthly reports were provided until the end of the year when they discovered they were not making a profit.

I asked what their profit goals were and again received a weak answer. So I backed into the answer by asking what the shelf price of the product was and the cost to distribute it. Subtracting distribution costs from the shelf price left a small number to accommodate per unit production costs and also produce an operating margin. When I multiplied the budgeted margin times the annual volume I asked if this was a good result for their effort prior to covering overhead expenses. A got a very disappointed look.

The end result of the conversation was that they needed to reassess their reasons for being in business because the model as currently operating was not going to lead them toward a profitable experience. The passion and desire to be in business was apparent but they had no idea of what it took operate the business toward a profit goal.

What are some of the basic lessons from this experience that should have been addressed before business operations began?

  • In addition to a business plan a financial model of the business should have been developed that would have allowed them to understand the sensitivity of the model to volume, distribution costs, etc. and the level of effort necessary to meet a minimum business goal.
  • There was no regular reporting of financial information to understand what costs were being incurred compared to the revenue that they were generating.
  • They engaged in a market where there were barriers to doing distribution themselves and or successfully negotiating more competitive distribution costs per unit that ultimately represented a significant part of the unit cost that they could not control.
  • Be careful relying on family members for performing significant roles in your business particularly if it is not an important focus for them. Once assigned it is difficult to reorganize without creating hurt feelings and conflict in the family.

While this was a micro-company the issues that affected their success also occur in larger business endeavors. If you want to be in business do your due diligence and get outside input which will be difficult to take but it is better to get objective perspective on the issues that will affect your success before you start rather than after investing time and money to get the same input.

Comments

  1. Phil Darby says:

    A business in the education sector that I encountered recently was selling all its available time yet not making any money and felt that the market couldn't sustain increased fees.

    Another, an on-line publisher had lost considerable sums each year for the six years since its inception and was sustained only by on-going investment by its founder.

    Sadly too many SMEs are rather more hobbies than businesses!

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