My friends make fun of me for having spent so much time in academic programs. I hold a professional graduate degree in public administration, a law degree, and a doctorate in religion and politics. All this school-going and my current occupation as a professor disguises my great interest in business. I love to read about it and think about it.
One of the things I enjoy most is asking entrepreneurs questions about their businesses. My sister and her husband are both corporate types who dream about owning their own operation some day. I love to talk with them about the different forms that could take.
From watching the many different television programs in which experts come in and try to turn around failing businesses and from the high failure rate of new start-ups, I suspect there are some basic points people don’t think about when they get into business for themselves.
- You must know what it will cost you to provide the good or service you are offering for sale. It is not enough to know that you had to purchase the widget for $1 in order to then sell it. You must know how much it costs you to possess the widget and how much it costs you in addition to possessing it in order to sell it. How much does it cost you to rent or own a store in which to display the widgets? How much do you have to spend on utilities, business licenses, supplies, etc.? How much do you have to pay employees? Somehow, some way you need to find a way to break those costs down into little pieces you can attach to each widget you want to sell.
- You must know what price you can get from consumers for your widgets. Once you figure that out, you will know if you can offer the widget for a competitive price at all. If you can’t, then don’t go into business selling widgets or whatever it is you wish to sell. Business doesn’t work if you can’t get a price that is higher than your TOTAL cost per unit.
- You need to know the velocity of the widgets you have for sale. By velocity (a concept I learned from reading this book by Ram Charan), I mean the number of times you can successfully sell your widget each day. If you will sell the widget many times in a given day, then you have the opportunity to rack up a nice profit AND spread out your overhead costs over lots of units which helps you offer attractive deals on the widget. If you will only sell the widget once each day or a few times a week, then you’d better have a very large profit margin. Think about Wal-Mart. They don’t have a large profit margin on each item, but their velocity is very high. They engage in a gigantic number of transactions which add up to a massive profit. If they only sold a few items each day, the big stores would quickly go bankrupt.
- If you are buying an existing business, then you need to have a very good idea of what it is worth. For example, if you buy a restaurant that rents its space in a strip mall, then all you are getting is the lease, the equipment, and whatever goodwill you think can retain or expand. You should be VERY careful what you pay for a business, ESPECIALLY if you are not getting a major physical asset such as the building.
Just a few thoughts, but very important ones.