Wednesday, July 18, 2012

That Devil Really is In the Details...

Over the last few years, I've been reading the NY Times blogs from entrepreneurs. While I've always enjoyed the articles, which are really dispatches from the front-lines of the entrepreneur's world, I particularly liked this post (from Jay Goltz, an entrepreneur who owns multiple businesses in Chicago)
as it really provides some interesting insights into what makes an entrepreneur a success. I'm not thrilled with the drill-instructor nature of his comments, but they still provide some insight into the focus on detail that needs to be a part of every start-up. Here is the post from Jay Goltz:

I recently had a conversation with a woman, Leah Rosch, who has been asking herself the kinds of questions that many business owners ask after a few years of struggling: Will this business ever make money? Do I have what it takes to succeed? Is it time to quit?

About six years ago, Ms. Rosch started a company called “What a Cookie!” It is an artisanal, decorated-cookie business, specializing in party favors — holidays, birthdays, corporate events — and gift arrangements. She told me that she had never owned a business before and has been “spiraling slowly downward” of late, ever since her accountant told her that her cookies were too labor-intensive to build a business around — one that will pay a living wage, in any case. As a last-ditch effort, she e-mailed me her “assessment for the future” along with some questions.

I have found that most people who start businesses are talented, passionate, and experienced at doing something, whether it’s writing software, cleaning houses, selling clothes or making cookies. If their businesses fail, the reasons generally have little to do with that talent, passion, or ability to make their product or provide their service. More often, the problems have more to do with marketing, management and finance, but they come disguised as a lack of cash, a lack of customers and a lack of good employees.

Because Ms. Rosch is struggling with the kinds of issues that many owners encounter, I wanted to share our exchange, and she graciously agreed. I hope the conversation, which has been condensed and edited, will be helpful to other owners facing similar problems.

Me: Your accountant is telling you what your financials say, and have been saying — that you can’t make money doing business the way you are doing business. That is just an accounting conclusion. Now you need an accounting solution, changing the business so that the numbers work.

Ms. Rosch: I understand about my accountant, but I think he’s looking at my bottom line the past several years and sees no significant income, and he figured he needed to warn me! Fact is, it’s hard not making any money, but easy — especially when the business is young — to get caught up in the mindset that money will come in eventually.

Me: I understand. My point is, you need to look at whether the business can be fixed. There is no question that continuing what you are doing is not going to all of a sudden start producing a profit. Let’s talk about your prices. Do you know your cost per cookie?

Ms. Rosch: I did a painstaking cost analysis several years ago and keep extrapolating upwards to keep up with costs. So now, with everything — ingredients, printed labels, cellophane bag, ribbon and labor per average one cookie — the real cost per cookie is about $2.25 per, for which we charge between $3.85 and $5.

Me: How did you figure how long it takes to decorate one cookie?

Ms. Rosch: We ballpark it at 10 cookies an hour, which is on the high side for the typical styles.

Me: Better to start high. What are you paying?

Ms. Rosch: Highest is $15 an hour to the top cookie decorator.

Me: Which means, with FICA, etc., it’s at least $16.50 an hour. So $16.50 divided by 10 per hour is $1.65, just for labor. Add in everything else, and it is probably costing you more than $3 per cookie. Which doesn’t leave you enough to cover your fixed costs.

Ms. Rosch: No wonder I am going broke!

Me: Exactly. That’s a rookie mistake. You’re underpricing to attract business — or at least not to discourage business — and you are not making any money. You need to stop this cold. There are three things you need to figure out: What does it really cost to make a cookie? What margin do you need? And how much do you need to live on, or what kind of profit do you need? For example — and let’s keep numbers easy for the sake of figuring this out — if you determine that you need to have a gross profit of $120,000 to cover your all of your fixed costs, including advertising and your salary, and your gross profit margin is 60 percent, you need to have sales of $200,000 per year.

Can you do that? Can you command a 60 percent margin, or more, selling specialty cookies to a corporate market? Can you make $200,000 worth of product out of your existing facility? That is $800 per day. That is a lot of cookies. My guess is that you can’t do this making a commodity product. You need to find a business model that works. These numbers are just examples, but is there a market for high-end specialty cookies?

Ms. Rosch: I don’t know. That’s what I’m trying to figure out! Maybe I need to change the direction of the company, streamline our offerings and better target the corporate crowd. For instance, I love the concept of creating highly custom corporate cookie gifts …

Me: I don’t want to know you’re in love with a concept — you need to be objective, but I like how that sounds. You need to sit down with a blank piece of paper and figure out how to build a business that would net you the money you need.

Ms. Rosch: I’ll try to figure out costs and stuff for this. But I’m not sure I can do the business as we’ve been doing it, producing this line. I think it would need volume …

Me: I think you keep this very high end. It’s corporate gifts — law firms, Realtors, all kinds of businesses need some novel thank-you gift to send clients. Who wouldn’t want a knockout really good tasting cookie with a clever saying? I’m talking, make one killer cookie that’s in a great box. It’s all about presentation.

Ms. Rosch: O.K., well, maybe. But I still have the whole thing about being out of my element running a business. For example, in the past year, I’ve gone through four cookie decorators. It’s exhausting to keep training people only to have them leave for a better-paying job.

Me: You’re not hiring the right people.

Ms. Rosch: So how do I hire the right people?

Me: How are you finding people?

Ms. Rosch: Ads on Craigslist, mostly. Because newspapers charge a minimum of $100 to run an ad for two weeks, which can add up to a small fortune, after a while.

Me: I don’t know … I think hiring the wrong person is what can really add up to a small fortune. My business has actually had some success with community newspapers. Are you requesting culinary degrees or experience?
Ms. Rosch: No, in fact we often do better with non-culinary types because we’re not “culinary” enough. Decorating cookies is more like a craft, so it’s often easier to train people with artistic ability. But it does help if someone has had some bakery work experience in that they get the production end of things — how to work efficiently. The decorator I just lost went to a private bakery where she’s getting $25 an hour, which of course I couldn’t begin to compete with. But she has worked in big production settings and so was helpful with setting up efficiency and prioritizing and speeding people along.

Me: Well, no reason you need to be paying $25 per hour. You need to look at who you are hiring. No offense, but this isn’t brain surgery. You don’t need someone with a college degree. You need to hire people who are good with their hands, and expect to get paid a production wage that will work for the business.
Ms. Rosch: I’m not looking for college degrees, but because it’s a small artisanal concept, I do think I need people I can communicate with. And if I’m paying less than a competitive rate, it’s like a quote-unquote sweat shop …

Me: Stop! Stop with these preconceived notions. Why is it a sweat shop? Will you have 60-hour work weeks? Bad working conditions? You certainly are not paying minimum wage. You need a paradigm shift. You need to hire people who need and want the job; they are less likely to leave if you treat them well. You told me that the other bakeries you have talked to have the same problem, finding and keeping employees. But I can tell you that talking to other people in your industry is like a self-fulfilling prophecy. It’s not where you get solutions; maybe commiseration, which can be useful in a different way. And if you want people to “communicate with,” make some friends! Look, every business has challenges and problems and puzzles, and you need to address each one. And just because you’ve tried something one or two ways with no success doesn’t mean the third way won’t work. Running a small business is puzzle-solving. I think you have the raw ingredients — if you can make the math work.

The bigger question: Are you willing to do what it takes? Or to put it another way, how bad do you want this?

Ms. Rosch: Well, I’m certainly willing to try to figure this out.

Me: There is no try! There is either do or not do. That’s from Yoda in Star Wars. Success is about your resolve and persistence — and, of course, whether there’s enough of a market for what you want to do. And again, some of the problems that you have been having, like not understanding your true costs, are common mistakes among rookies.

Ms. Rosch: How long is one a rookie? I’ve been at this for more than six years!

Me: In some ways, we’re all rookies if it’s a new venture or we’re targeting a new market. But you’ll stop being a rookie when you start learning from your mistakes and stop repeating them. In learning-business years, six years is not that long. Do everything you can to fix your problems before you decide to quit: cost accounting, a budget that works, a doable marketing plan, a better hiring and management strategy. You can do it. I think.

Here is a link to the story and the rest of the posts:


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