09:31 – I read an interesting article the other day on CNN or FoxNews about small business owners pawning their Rolexes to meet payroll, and a second article about lending being extremely tight even for those with top-notch credit ratings. Interest rates are very low, which means nothing if no bank will lend you money.
Fortunately, I don’t want to borrow money. In fact, the last thing I want is to borrow money. That may seem odd for someone who’s just starting a small business, but in my experience the two biggest causes of small business failures are borrowing money and hiring employees. When Barbara and I talked about this new business, I told her that I intended to fund it out-of-pocket and that I would not hire our first employee until Barbara and I were run ragged and also had some assurance that the hectic pace was not merely a seasonal bump in sales. And, even then, I’d almost certainly contract work out or, as a last resort, hire a temp/part-time employee.
The problem with borrowing money or hiring employees is that you give up control by doing so. As long as we avoid either, we don’t have to worry about making a loan payment or meeting payroll, which is the way I want it. Now, if only the US government would be equally careful with our money.
Inventory of the chemistry kits is getting perilously low, so Barbara is taking the day off from work tomorrow to help me build more. We have enough components to build another dozen or so kits, and all but one of the components needed to build 50 or so more beyond that first dozen. The problem is, that one component is back-ordered for about the next three weeks. So we’re going to build all of the kits, but missing that one component. That way, we can just drop in that one component when it finally arrives and have kits ready to ship.
I’m also preparing purchase orders that I can drop on a moment’s notice if kit sales pick up quickly as the new school year approaches. Making up all the chemical solutions for any arbitrary number of kits is a couple days’ work, whether I make up enough for 50 kits or 500. The really time-consuming steps are filling and labeling the containers, assembling and packaging the chemical blocks, making up the small-parts bags, and assembling the kits themselves. For 50 kits, that’s maybe three days’ work for Barbara and me working together.
The media, including most of the financial media, is putting as favorable a spin as possible on today’s Spanish bond auction, although of course the yields remain disastrously high. That WSJ article does mention one significant factor that’s being generally ignored in news reports: a large and increasing percentage of Spanish bond sales are being made to Spaniards. The latest figures the WSJ quotes are for the end of last year. I suspect the percentage of Spanish bonds being bought by non-Spaniards is much lower now. And what few of the reports mention is that Spain has to sell another €38 billion in bonds–more than ten times as much as they sold today–between now and the end of the year. Good luck selling €38 billion worth of bonds into the Spanish economy, which is already nearly saturated.
Just out of curiosity, what’s the one component you can’t find? Given the breadth of contacts your readers have, maybe someone can put you on the right track.
A couple of years ago, I considered taking over an existing business, and rejected the idea because I would have to hire one or more people and be responsible for paying them. Also running the company without debt would be tricky. So I understand exactly what you’re saying, and agree completely.
It’s the 10 cm stainless-steel spatula/spoon. I’ve already checked with all my wholesalers, which among them have literally 95%+ of the US wholesale lab equipment market. I can probably buy the things at retail, but the problem is that they’d end up costing me a lot more than I pay now. If I have to backorder kits for a couple weeks, I don’t think it’ll be a big problem.
In the case of walk-in retail small businesses I would also add location, advertising, and policies to the reasons why small businesses fail. Location because they pick a crappy location because the rent is cheaper and they think their business idea is so great that people will go out of their way to find them. Advertising because they do none. They rely too much on Word of Mouth. Policies because they have this habit of plastering the cash register area with dozens of handwritten signs stating that they don’t do this or that.
There’s a reason why nationwide chains send out scouts to find good real estate with high traffic and/or pedestrian counts during both the work week and weekend, they spend money on advertising to announce their opening and their presence, and I have yet to to walk into a major nationwide retailers location and be inundated with signage about all the things they refuse to do (usually it’s a bounced check and a return/exchange policy and that’s it).
Though, in the retail world they usually need to hire employees or they run into the problem of being closed everytime the owner/operator needs time off.
I’ve always heard that you need 3 years of operating funds before you should open a business. That’s 3 years of cash for utilities, rent, payroll, and inventory. That usually greatly exceeds what most people have put aside to open their small business so they second mortgage their homes and/or resort to small business loans.
Myself, I could never open a small business because it’d never hold my interest. I’d open in January and by July I’d be bored with it and wanting to do something else.
Well, I’ve always been a proponent of choosing what to do for a living on the I-would-do-this-for-free-if-I-could-afford-to basis, which is the case for doing science kits for home schoolers and others. I agree with everything you said except about advertising. I made a conscious decision to depend on word-of-mouth. Part of the reason for that is to keep the kit price low, and homeschoolers are very well networked. There’s not much advertising would do for me in the long or even medium term. I also decided to price the kits with no margin for retailers, also to keep the price of the kits as low as possible. Retailers typically require 40% gross margins, which means I’d have to price a kit that currently sells direct for $150 at $250.
I realize that a lot of people would question some of my decisions. I’m an MBA after all, and I know that some of what I’m doing is “wrong” in the business-school sense. But the thing is, most companies are focused on constant growth in order to keep the shareholders happy. I don’t have shareholders to please, and I don’t care how quickly or slowly we grow. In fact, rapid growth is one of the most dangerous things for a small business, particularly in this economic environment.
To actually make a decent living at this, we’ll have to sell 1,500 to 2,000 kits per year, which is my eventual goal. But I won’t be upset if it takes us two or three years to reach that point. Over the coming months and years, we’ll be rolling out more kits, starting with biology and forensics, and eventually covering physics and the other sciences. Eventually, I hope to grab a significant market share, but I’ll do it my way or not at all.
A possible market for the kits might be grade schools themselves. My wife’s company works extensively in K-12 and they are always buying onseys and twoseys of products to try them out. I bet there are plenty of high school chemistry teachers who could get their school to buy a kit. Maybe even for a chem club at the school.
It’s hard to break into the HS market, but once you are in, you could tap all those piles of Obama/Dept of Ed dollars.
Bob, you are targeting a very specific market, and therefore don’t require the advertising a typical brick and mortar needs, especially if the owner ignored the first two rules of real estate. As you’ve mentioned the homeschooling community is well networked, and word of mouth will work just fine for your purpose.
You’re also correct about rapid expansion, often the death knell of a small company. I’ve seen it happen time and time again. Almost always due to the person who created the company being unable (or unwilling) to find suitable employees to take over daily operations.
On topic: IMX, never hire one employee. Overhead too high until you reach 3.
OT: Agatha Christie was a surfer?
http://www.telegraph.co.uk/culture/books/8670354/Agatha-Christie-one-of-Britains-first-stand-up-surfers.html
She was indeed! She described her surfing experiences (among many other interesting things) in her autobiography.
She was a damned interesting writer.
It’s hard to break into the HS market, but once you are in, you could tap all those piles of Obama/Dept of Ed dollars.
Thanks. I’ve thought about this, but right now I’m focusing on homeschoolers and small private schools, mainly because of the paperwork and regulations involved in selling to public schools. I’m also told that, particularly with the current economic situation, many public schools are slow-pay and some are even no-pay, and I really don’t want to tie up working capital in that kind of situation.
Perhaps if we get to the point where eating the cost of 30 kits isn’t a big deal I’ll start looking at higher volume buyers, but right now I’m happy to be selling onesies and twosies.
Bob, you are targeting a very specific market, and therefore don’t require the advertising a typical brick and mortar needs, especially if the owner ignored the first two rules of real estate. As you’ve mentioned the homeschooling community is well networked, and word of mouth will work just fine for your purpose.
You’re also correct about rapid expansion, often the death knell of a small company. I’ve seen it happen time and time again. Almost always due to the person who created the company being unable (or unwilling) to find suitable employees to take over daily operations.
I’m not convinced that advertising is worth the cost for any business. If we do advertise, eventually, it’ll be in homeschool group newsletters initially, where it’s often possible to buy a quarter-page ad for $25 or so. I don’t know if I’d ever consider advertising in one of the glossy homeschool magazines, which costs a lot more. And, as you say, homeschoolers are networked out the wazoo, so word of mouth will probably keep our business growing as fast as I want it to grow.
I’m wondering that the future of our country holds. I know a young man who gets very good grades and his parents both have “real” bachelor’s degrees. When I was his age, I think I already had a chemistry set and microscope. I’d consider buying him one of Bob’s chemistry sets, or the chemistry book, but I don’t think he’s ready. And if he isn’t ready, I have to wonder what child his age is.
Dave, if someone like you can’t step up to the plate and buy the guy a microscope, the future is sad indeed! Get off your ass and supply him with ANYTHING to pique and whet his curiosity. If he’s as bright as you say, nature will do the rest.
I just don’t understand your comment; are you waiting for the gobbmint to step in? You identify the problem and complain about it, but yet won’t DO anything? If not you, who? Who bought your first chemistry set or microscope?
Jim
Who hauled a second-hand microscope to India 10 years ago, and its owner is a now a neuro-scientist in Cleveland…
Jim, I’m willing to buy the Chemistry set, the recipient isn’t ready yet. A microscope will happen sooner.
RBT Wrote: “I’m not convinced that advertising is worth the cost for any business.”
Well, this is certainly true of the majority of advertising. It’s directed at the wrong people, in the wrong manner. Bombarding people with your name serves well for certain products, but it won’t do much when it comes to choosing a gutter installer for your house. That’s where targeted advertising does work, and works quite well. Word of mouth suffices only when there are mouths to spread the word.
You just be damn sure it (the microscope, et al.) does “happen” sooner rather than later, or else…
I keel you!
http://www.youtube.com/watch?v=1uwOL4rB-go
http://arstechnica.com/tech-policy/news/2011/08/p2p-lawyers-get-their-comeuppance-in-the-form-of-fine-suspension.ars
Same UK patent trolls get their just desserts…
Speaking about small businesses…from today’s NY Times:
Basics of Accounting Are Vital to Survival for Entrepreneurs
http://www.nytimes.com/2011/08/04/business/smallbusiness/a-few-accounting-essentials-are-crucial-for-survival.html
Well, I said a few days ago that Fred Nile wasn’t crazy. Looks like I was wrong. We’ll have to deport him to the US to be with all the other loons there…
http://www.abc.net.au/news/2011-08-05/27nazi-philosophy27-behind-ethics-classes3a-nile/2826280
Doesn’t work that way, Greg. Australia is the dumping ground for the criminally insane.
No, 200 years ago we were the dumping ground for the UK’s petty crims. Nowadays we send our undesirables to the US where they fit right in. For example Ken Ham, who was just too weird for us, but he’s a moderate by US nutter standards.