Keep Your Business From Closing
Q: I've been open for eight months, and at this point, I may have to close my doors. When I first started, I took out a $35,000 second mortgage on my home and made a lot of mistakes that cost me a lot of money. I've been unsuccessfully trying to recover the lost money unsuccessfully. My location killed my business, and I'm currently looking for a new location I can move to and still try to cut my costs. I'm the only bakery in the whole county, and there's no reason I can't run with this opportunity. Is there any kind of funding available out there to help me keep my small business alive without going for another loan?
A: There's a commonly held myth that can destroy your business: Do what you love and the money will follow. As you've discovered, that's not true.
Don't despair. I wouldn't advise borrowing any more money just yet. Put yourself in "emergency mode!" You need to educate yourself as a businessperson-fast! Don't beat yourself up for what you don't know about business. Unfortunately, business basics aren't taught in school. (Heck, I graduated with a degree in Business Administration, and I didn't even know how to balance my checkbook.) Financial and business information is available in books, on tapes and at cool Web sites such as Entrepreneur.com You can do this.
First, put the brakes on any unessential spending. I don't imagine you're being extravagant right now, but watch your checkbook carefully. Your next step is to crunch some numbers. Using the data you have from your business, put together a budget. How much is it costing you to be in business?
Are you using an accounting software program? You can create a budget with that program. Or use a columnar pad and your checkbook register. You must confront your costs. List the overhead costs (those that must be paid whether or not anyone buys anything) and the direct costs or cost of goods sold (those costs that are directly related to product sold, such as flour).
Now how much can you generate in sales? Play out five or six different scenarios for sales. Use your current pricing structure. At this point, I bet you'll find exactly why you aren't making any money: Your selling price isn't high enough to cover your costs and allow for profits, which means less of a salary for you.
Crunch the numbers again using higher prices. How high can you go when it comes to prices? Consider the price range on a watch-$2.99 to $50,000. Who would've thought that we would pay $4 for a cup of coffee, but that's what Starbucks charges. I know you can charge more than you think you can. You're the only bakery in the county. If you choose to stay in business, I imagine you'll have to raise your prices. I'd need to see your financial data to be certain, but 99 times out of 100, I find that owners set unrealistically low selling prices.
From here on out, I want you to run financial reports every day. Run an income statement and a cash flow requirements report. Enter the bills that come in every day. You don't need to pay them until they're due. Just enter them as "Accounts Payable." You don't need any surprises.
If you choose to raise your prices, you must develop your marketing and sales skills. The market will bear all kinds of prices. It's the marketer, not the market, who sets the price. Remember, you don't have to stay in business. Winners make mistakes, but they keep bouncing back. It's just a business; it isn't you. Meditate on this and listen to your heart. What do you want to do?
Before you sign a new lease or borrow any more money, get out your calculator and get busy number-crunching. That's where you'll find your answers.
One more thing: Read The E-Myth (HarperBusiness) by Michael Gerber. The heroine in the story is a baker. You're going to think he's talking about you on every page of this book. It should be required reading for every business owner.
Author Ellen Rohr nearly starved in her family's small contracting business-until she learned how to manage money. "Do what you love, certainly," she says, "but the money won't just take care of itself." Ellen's pricey college education didn't prepare her for real-world business. "Financial business basics aren't that difficult.but where do you learn them? Unfortunately, business literacy isn't taught in school. I teach the basics and take the mystery out of making money." Ellen's mission as an author, columnist and seminar leader is to help people make a living doing what they love.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
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