Author Topic: How long to stick it out with small business?  (Read 2111 times)

BrownDali

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How long to stick it out with small business?
« on: September 18, 2018, 01:44:56 PM »
Hello Mustachians,

I searched the forums and didn't see anything quite like my conundrum so am seeking input from the greater Mustache community. Thank you in advance for your time and considerations.

The Challenge: How long to continue with a startup business that 1) has high overhead, 2) is not yet generating profit, 3) has a great product (custom European cabinets) and 4) is located in a bustling construction environment.

Summary: Last January, I opened the doors of a leased (2 yr) shop space in Bellingham, WA. Under the guidance of a seasoned cabinet maker who is semi-retired himself (read savvy businessman/excellent craftsman). Having a background in woodworking, a strong appetite for learning, long-time frustration as an employee and motivation of a new father to succeed, this seemed like a good venture for me. I purchased the equipment (with savings) from my cabinet maker mentor and we completed three months of work together - in which time I received open book guidance on his bidding process and construction techniques. I also inherited some high end clients. Sounds great, right?

The last 5-6 months I've been running the business on my own (with the help of one part-time employee two days per week). Finances have been tight- I've managed to pay the bills and feed our family but am definitely not generating any profit and/or savings. This is my first business and I do not have any formal business training. I opted for a 2 year lease on a building in an industrial part of town, thinking this would be a good trial period to evaluate the business and see if it was viable/enjoyable/worth pursuing. At less than one year I find myself frustrated with the amount of overhead required, slow workflow coming in and high stress.

The nuts and bolts:
-Business overhead (rent, utilities, internet, insurance, truck fuel (for deliveries and installs), tools/repairs, phone: ~3,000 per month, ~$36k per year.
-Part-time employee wages (plus L&I and associated taxes): ~$24k per year.
-Personal overhead (mortgage, food, insurance, gasoline, small fun budget): ~2,700 per month, ~$32k per year.

Total money going out: ~$92k

In order for this to be viable, it would seem the business needs to gross at least $12,500 per month, $150k per year. $150k - 60k (business expense) - 30% (material costs) = $45k taxable income for me (not counting mortgage deduction, etc). Ramping up production should correlate


Like many of you, I too seek the road to FI. I'm trying to decide how much time/energy/money to put into this endeavor. I enjoy most facets of the work - it is challenging and rewarding. But I also don't want to waste another year with nothing to show for it when I could simply plug back in working for someone else with zero overhead and the potential to get back on track saving.

Thank you for any and all opinions.

Cheers!
Nick



PlainsWalker

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Re: How long to stick it out with small business?
« Reply #1 on: September 18, 2018, 02:27:57 PM »
Talk about jumping in with both feet! That is quite the venture you've embarked on.

How are you generating sales leads? Are you the go-to boutique cabinet shop for a couple of general contractors that give you repeat business or are you mostly doing one off builds for individual projects? It sounds like you have the production side of the business nailed down. What are you doing to learn more about the marketing and business side of things?

feelingroovy

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Re: How long to stick it out with small business?
« Reply #2 on: September 19, 2018, 08:19:48 PM »
This sounds pretty normal to me for a first year in business.

I started my business 10 years ago and wasn't able to pay myself the first two years. The third year I managed to pay myself $500/month. Now I make more than I ever did at a job and only work 35 hours/ week.

I'm very happy to hear now and enjoy building the business but I definitely underestimated the stress of those first 5 years or so. I kept going because I believed I could do it. But if I had known what I would have to go through I'm not sure I would have ever started.

It's too personal a decision to tell you when to give up (or not). You didn't say what your gross revenue is. A rule of thumb is that payroll (24k + 32k) should be no more than 50 percent gross revenue. So as your expenses are now, you should bring in $116 k.

I would highly recommend Profit First by Mike Michalowicz.

It's at Amazon and he also has a podcast

BrownDali

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Re: How long to stick it out with small business?
« Reply #3 on: September 22, 2018, 09:10:36 PM »
Thank you for the replies!

PlainsWalker: Sales leads are coming from existing contacts I have in the local construction industry, referrals from satisfied customers and what has been passed along from my mentor. I've started cold calling construction companies more and dropping in for face to face introductions too. Just recently posted some ads (physical signs and Facebook). I've also met with a local business council group that offers support to startups and am attending a marketing seminar at the local comm college in a couple weeks.

feelingroovy: It's comforting to hear this sounds normal and that you're happy having stuck it out. I believe I can do it also but am starting to doubt if it's worth what it will take to get there. As for gross revenue - this year should close around 100k with what's been done and what's on the books. But given the production capacity of the shop, I think that number could easily be 150 - 200k. It's just a matter of generating consistent work. I'll check out Profit First - I've heard that referenced before.

Thanks again for your replies. I'll just keep plodding along for now and try not to let the dollars and cents part create too much stress. All the best.



CowboyAndIndian

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Re: How long to stick it out with small business?
« Reply #4 on: September 23, 2018, 08:04:22 AM »
Sales leads are coming from existing contacts I have in the local construction industry, referrals from satisfied customers and what has been passed along from my mentor. I've started cold calling construction companies more and dropping in for face to face introductions too. Just recently posted some ads (physical signs and Facebook). I've also met with a local business council group that offers support to startups and am attending a marketing seminar at the local comm college in a couple weeks.
...

Are you targeting architects? A lot of these high-end designs are put in during planning time, not at construction time. So, architects would be better than construction companies.

tralfamadorian

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Re: How long to stick it out with small business?
« Reply #5 on: September 23, 2018, 11:59:44 AM »
The Challenge: How long to continue with a startup business that 1) has high overhead, 2) is not yet generating profit, 3) has a great product (custom European cabinets) and 4) is located in a bustling construction environment.

...I've managed to pay the bills and feed our family but am definitely not generating any profit and/or savings....

...But I also don't want to waste another year with nothing to show for it...

I'm not sure why you mentioned several times to the business is not profitable when it is. It looks like out of the gate it is generating enough profit to support the bare bones expenses of your family. For most small businesses this would be considered a great success.

feelingroovy

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Re: How long to stick it out with small business?
« Reply #6 on: September 23, 2018, 02:54:53 PM »
I absolutely agree with you Trafford ordinary that he is doing extremely well in being able to draw a salary his first year in business. Even one that just covers bare bones expenses for the family. Most businesses can't do that.

But that's not profit. Profit is above and beyond what he has to pay all expenses, including salary for his own labor.

It sounds like semantics, but it's really important to a small business owner's mindset and decision making to separate out your own salary and profit. For example, it can be useful to reinvest profit in the business to fund growth but you do not want to ever do that with your salary.

And if you ever want to sell the business, you need to be able to hire someone to replace your labor, plus have profit. It's the profit that determines the value of the company.

I struggled with this concept for a long time. Until you are actually paying yourself a real paycheck through payroll, it's very hard to keep separate.

I'm sure I have the exact number wrong but apparently over 80 percent of businesses are not profitable.

Christof

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Re: How long to stick it out with small business?
« Reply #7 on: September 23, 2018, 03:51:04 PM »
Like many of you, I too seek the road to FI. I'm trying to decide how much time/energy/money to put into this endeavor. I enjoy most facets of the work - it is challenging and rewarding.

Short version:
You are doing fine for now.

Long version:
Knowing what your expenses are and what you need in revenue as well as actually not losing money puts you into the top group of businesses. Most business owners never get there at all. There are a few things you need to learn and understand, though:

Owning your business is not a way to get rich quickly. Yes, there are some business models where it's more likely to get rich quickly and there are businesses that make a lot of money in a short time, such as running this web site. However, be aware that this strongly influenced by survivor bias. Most blogs don't make profit. Most small businesses don't make profit. The survival rate for the first five years is pretty small, actually. Focus on surviving, not making a fortune. Your road will be rewarding, but not be a shortcut.

Secondly, there are a few things you need to learn and understand. The more you learn from mistakes others made, the better you are off. Most people need to make mistakes themselves, though.

First and most important is that revenue is a prerequisite. You need to make money in order to survive. No revenue, no business. However, it's not relevant to staying in business. I've seen a lot of clients and partners go out of business. Not one of them went out of business due to a lack of revenue. Not a single one. It was always cash flow and expenses.

Expenses are easier...

If you need $100/hour to produce something, then selling for $120 instead of $110 doubles your profit, but only increases your price by 8%. Please keep this mind when you negotiate prices. Read this sentence multiple times. It took me years before I actually understood what should be obvious.

Many of your expenses are 100% losses in revenue... Understand the difference between investments and expenses. The salary of your part time employee might look like the highest expense. However, if hers or his work is billable, then it's an investment. Your rent might look like a small expense. Be clear why you rent the space you do. Is it because your own place is too small for the equipment, because you live somewhere where you are not permitted to work, etc. Same with phone lines... Internet and phone does sound like you are paying twice. If you worry about being reachable investigate into call forwarding to your private cell phone, or look into cheap offers using voice over IP.

Money you don't spend is your profit. Just make sure you are not saving pennies, but paying dollars to do so.

Secondly, you need to keep an eye on cash flow. It doesn't matter how big a job you got and how much money you will make in the future if you can't pay your bills today. There are two things that are really hard to do as a business owner: Firing someone and saying no to a job. Both will be necessary at some point.

It's really important to keep in mind that every business size only supports jobs of a particular size. There are many opportunities that I have to ignore, because they are too small for our business, just as there are many contracts that sound exciting, but are actually too big for us. Accept the wrong job, and you're out of business.

You should always have an idea how to pay your next bills. If you don't, optimize your processes until you do, as otherwise you will end up in a situation where you have to pay, but have no idea how to.