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Start Business Money Continued
This page is a continuation of Start Business Money. If you have completed your sales/revenue model yet, please do that first, otherwise this page doesn’t make any sense.
Once you have completed your sales and revenue model, you are ready to work on your COST model. I know I’ve said it before, but it’s worth repeating, staying in business for the first few years is ALL ABOUT MANAGING YOUR COSTS! If you can manager your costs/cash flow in the first few years you are likely to be in business for a very long time.
Most new businesses do not manage costs
A new pet store opened in our community and naturally I went in to see how they were doing. It was started by a couple of women who spent YEARS planning to open their store. It’s an adorable store and because I have two dogs and three cats I’m a PRIME customer. BUT… there is one problem that I think is going to limit their success.
They bought too much of the WRONG inventory and not enough of the RIGHT inventory.
In other words, they have a COST/MONEY/CASH FLOW problem. They spent all of their cash on inventory that doesn’t turn/sell quickly enough to allow them to replenish what does sell. They have lots and lots of cute gadgets and dog clothes but very little DOG FOOD? No Dog Food? It’s hard to believe, but very common. Dog food is LOW MARGIN and not very much fun to buy or display (it smells and its very labor intensive to stock), so they’re trying to limit how much they carry; allowing them have money for the FUN stuff. What’s the problem with this approach? People come to pet stores to BUY PREMIUM DOG FOOD! Go to any Petco or PetSmart and you’ll see a ton of dog food in the back of the store. Making you walk past all of the HIGH MARGIN items to get to the thing you want. The small store in my town is going to run out of dog food, but won’t have produced enough cash to restock for the volume they need. This is a common problem in small stores. You don’t always find the item you want, even though you bought it there before.
This is the MOST common mistake of new businesses; they spend money on the wrong things and end up with huge cash flow and inventory problems.
How do you avoid this Start Business Money problem in your business?
Let’s go back to the original Start Business Money questions: - 1. How much startup money/revenue will I bring in per month for the first year?
Click here to complete your Sales Model Using the your Sales and Revenue plan you created in the previous step, you should be able to produce your Cost/ Cash Flow plan for the first couple of years:
Click here for the cost model for the Start Business Money DK Designs
NEVER produce more inventory than you need, otherwise you’ll end up with TOO much inventory that YOU can’t sell. Sticking with this one assumption will probably allow you to survive in the jewelry business until you figure out what sells and what doesn’t. Now we go back to the question of how much money you need to operate for the first year, you should be able to limit it to the amount needed to produce your first three months of inventory, as long as you don’t over spend on inventory!
Each business is different!
Obviously, each business is very different which is why it’s VERY critical that you create your own cost model! So using the information provided and you Sales/Revenue model try creating your own cost model. Also list some simplifying assumptions you need to make to create a relatively accurate model. Remember those assumptions are probably what you’ll need TO DO to mange your cash flow for the first couple of years.
How does it look?
Does your model look doable? Do you have the cash available to start this business? If not can you raise the cash necessary to get started? Having your model in hand allows you to ask and answer all of these questions. Hopefully, that little Pet Store I visited has done this kind of planning and they can re-stock their Dog Food and make it through the first couple of years! Once you’ve completed your cost model you’re ready for question three:
- 3. What is the monthly difference between those numbers? Another name for this question is how much profit or loss am I likely to have in the first year as I plan for start business money? Click here to answer that question and to complete your PROFIT plan
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