Gordon Woolf's Blog

Start a business - but don't risk the house

Gordon Woolf suggests a slow start using market stalls and the trendy "pop-up store" might be the better way

It was a casual discussion: An acquaintance was unsure of his work prospects as the company he worked for had put off several people and rumours were that some more jobs might go. He told me that what he and his wife would really like to do was to start their own business.

They had got as far as a talk with an adviser at their bank and he had worked out what he thought they would need to start a retail business in a field they both knew something about, basically what had been a hobby for many years.

But the more he delved into the idea, the more money it seemed they would need: advance payments for rent, the cost of fitting out a shop, deposits with utilities such as the electricity supplier, and the few suppliers he had contacted were happy to provide the products, but only with advance payment and sometimes with substantial minimum order quantities in order to get the discounts they knew they would need to be competitive.

The bank was actually quite happy to provide a loan, but only if they secured it either with a second mortgage on their home or renegotiating their whole mortgage. Despite house prices dropping slightly in the area they lived (in part due to the job insecurity which was leading him in this direction) they had been paying off their loan diligently and had a good equity.

The stumbling block was that his wife was not prepared to risk their home on what seemed to him to be a project destined for certain success.

He was more than a little surprised with my reaction: "Good on her!" was the Australianism I used.

I did tell him the old story about a lot of new businesses failing in their first couple of years and of only a small minority still being around after five years. I did temper that with the added information that many of those were not really failures; they were ideas that people had tried and closed because they did not work out as intended, or even because family circumstances changed, but where all the bills had been paid. To try an idea and get out without any debts is not failure, at least not in my eyes.

The problem with this couple's plan was that they were intending to invest far too much, and being encouraged in that intent by their loan provider.

My suggestion was that while he was still at work, they should start small, with a stall in a couple of local weekend markets, and start a web site (perhaps using eBay) and hand out flyers and cards wherever they could.

As the business grew, as I was sure it would, he could take some of his accumulated holiday and long service entitlements to spend time seeking the bargains that are always around to people who have cash to pay for them. Even large wholesale suppliers will often be generous in interpreting those quantity discounts for someone who is prepared to pay cash. Maybe they won't split a carton, but you can ask for that 5-carton rate to apply on the single carton order if you are paying on the spot. (It could just be the few hundred dollars that means they can avoid going into overdraft to pay their four-figure power bill due tomorrow.)

This does mean that the new business needs a reserve of cash for these opportunity purchases. That cash can quickly disappear if it is going to pay the interest on loans.

Our budding retailers could also consider the latest trend for "pop-up stores". The very trend which has affected this couple's house value could also mean that there are empty stores in their nearby shopping areas. Landlords have become accustomed to insisting on long leases and ever increasing rental payments, even if they have to offer rent-free periods and subsidised fit-outs to get them, but those in strip shopping streets in particular may be willing to accept a rental for a few weeks with options of renewal. Landlords are by nature optimistic; they always think the market will pick up and their premises will be let long term in the next week or two, even if it has been empty for a year or more.

It is amazing how good a store can look with a few tables and boxes covered in crepe paper, but do get a lawyer experienced with retail leases to check out a lease before you sign it: that will be a good investment. You'll also find some good display equipment available secondhand, and watch the auction websites for the stock from failed businesses that is still effectively new. It could also be worth asking around retail stores. I found an Aladdin’s cave of rescuable display fittings in a shed behind a local department store.

It seems that "instant retail" is fostering other businesses to cater for the trend. I found a business in that name which hires display equipment and an online search for pop-up shop brings all kinds of entries from blogs to services intended to link renters with landlords.

So, my advice for the would-be new business entrepreneur is to start small, and start cheap. Put what money you have into finding good reliable suppliers of goods at prices which will give you the margin to gradually build up your business. You may need some good luck but I would suggest that you do not start with a loan.

How can they sell at 50% off?

As I write this the end-of-year sales are on and it seems every store in catalogs and on TV is advertising "50% off". How can this be legitimate? Does it mean I paid too much at any other time of the year?

My answers are: Yes, and Maybe.

Let us look at how retailing works. The retailer buys either from a manufacturer or a distributor. There will be standard discounts which will vary according to the trade and type of product. Basically it will also depend on how quickly the items are expected to sell and the risk if they remain unsold. For example, a newspaper or milk may be sold to the retailer on "sale-or-return" so effectively the retailer only pays for what they have sold, while the distributor takes back the day-old newspapers or the week-old milk. The retailer is expected to pay quickly but will always get a credit for the returns, often before the account has to be paid. That can mean they do not have any capital tied up but the percentage profit they make, whether calculated on the price paid by them (the cost price) or the price paid by the customer (retail price) is small.

On the other extreme, in the fashion industry, as it was traditionally, the stock changes either twice or four times a year, and has to be ordered well in advance of the changing season. When prices were stable the clothing store would bundle up the winter clothes as summer approached and store them until next winter. But fashions change and changes were encouraged by the trade, so the fashion end of the retail market would expect to sell the new season's clothes at a big mark up, at least double the price they paid to the distributor.

They would know that not everything would sell quickly but they needed stock in their store through the season. Their takings would become less as the season progressed and it was normal to offer discounts and, at the end of the season to sell whatever was left in a clearance, often at half price or less. That would mean they made no profit on the last items sold, maybe even made a small loss. But overall there would be a normal profit, provided they made the right decisions when they made the initial order. As an example, let's say they bought 100 dresses at $10 each. That's $1000 paid out. If the first 50 sell at $20, that's their cost back, and the remaining sales, let's say they all only sold in the clearance, at $10 (which is "at cost" or a genuine 50% off what they had been selling for, then overall they have made a gross profit of $500 on that original $1000. Out of that they have to pay all the expenses of running the shop.

The retailer buys most stock knowing that they are going to have to discount in the end so they buy on the basis that they must make a certain average margin across sales of the entire stock. Then they make guesses, based on experience, about how much of the stock they will be able to sell at "full price" and how much at various discounts. They then set up their "full price" (which might be +100% or even more of the wholesale purchase price) and their various discounts to give them -- on average -- the margin or gross profit they must make on selling the entire stock.

Now it starts to get complicated, because we have to cope with the opposing forces of increasing production costs, a rising currency conversion rate, changes in fashion and whether there will be a new, improved version of the product coming soon. With rising inflation and/or a falling dollar it will not cost $1000 to replace what cost they bought previously. It may cost $1050 or $1100, and those extra dollars have to come out of the profit from the previous season.

If changes are the other way, and the replacement equivalent will cost $900 or $950 then it may seem that retailer is doing better and has more than his $500 overall profit. We tend to have a well informed public and if it is an electronic product instead which is being cleared at "50% off" then even that apparently huge discount may not be enough, and so discounts rise even higher. The superceded TV or tablet may have to be almost given away once an announcement of the new version has been made. Much better to have sold it for whatever the retailer could get a few weeks earlier.

Things get even more complicated when a distributor offers increased discounts according to the quantity purchased. The savvy retailer needs to make a lot of calculations and include some informed guesswork to decide whether the extra discount is worth the added risk. If the extra discount is sufficient, then the retailer has to decide whether the incentive to the customer should be offered when he buys or after he has sold his expected number of items at what is now an additional profit. This decision may also be affected by whether the product has a use-by date.

Manufacturers make mistakes, especially with variations such as flavours or colours. They may make arrangements to advertise a "special" and give the retailer an incentive to have greater stocks at that time. The retailer with cash reserves may buy then knowing that he'll sell more "on special" and have sufficient left bought at the better price to cover normal sales for a period thereafter. This will not work if the manufacturer has packed the "special" with different wording, such as a date-limited competition.

My real estate friend was fond of saying "there's a price for everything". The skill was finding that price. To the savvy customer who does not mind having last season's electronic gear or fashion, and the product with an expired competition date may be at an attractive price in a clearance store.

If we are to continue to have suppliers in the future, whether on-line or physical stores, then it is not the profit on any individual item which matters, it is whether the retailer is making sufficient overall to pay for the replacement stock plus all the other costs, including a wage for the retailer, and thus progress into the next trading cycle.

This brief summary does not cover all the reasons why you can legitimately find products at "50% off", but I have a couple of further warnings: Beware statements such as "up to 50% off" where many items may be at full price or at a much lesser discount, and beware the second or third tier chain trick of have legitimate branded products packaged without a normal accessory or tool and compared with the price of the full item "elsewhere".

You should also consider reasons for purchasing other than price. Will the place you are buying from help if you have problems? Or just be willing to show you how a device works, or set it up as well as delivering it? Price isn't everything.

Gordon Woolf is a co-author of Success in Store: How to start or buy a retail business, enjoy running it and make money, available from Amazon and The Worsley Press.
 

The need to make a profit

The radio caller was critical of banks, which is not unusual, but she put it in a somewhat odd way: 'I have to pay them interest, but what do they actually DO (for me?)'.

This may be partly the reason for the current Occupy movements around the world. To some youngsters it may just seem that if their parents run out of money, they just have to go to "the hole in the wall', but to those parents does it also seem that if they can buy computers, washing machines, furniture and so much more on "48 months interest free", why should the banks charge interest. After all they are only giving you money for a while, not goods permanently.

I know that doesn't make sense, but it kinda sounds logical.

The reason for the demonstrations that I have sympathy with is that it is no longer true that the rich are getting richer and the poor are getting poorer -- it is, some people have pointed out with figures and graphs, that the super-rich are getting richer, and that the rich and the poor are getting poorer.

I could claim that some of my best friends are millionaires, which is not quite true but I have known a couple well enough to visit their homes and have them visit mine. I don't envy them. Sure they make more money than I ever had but they do have to work unusual and long hours and the stress level is more than I would want, even though as a newspaper editor I once flourished on stressful work.

But we now have company directors who get pay increases by the millions and yet manage to do similar work for several companies at the same time. If their individual jobs were at the stress level of "my" millionaires, they'd have been dead long ago.

That's what I mean by things getting less fair. And therefore in general terms the Occupy movement has my moral support.

I'm not particularly blaming the chain store owner with his 48-months interest free and similar offers. The one I have in mind has said that people are stupid to accept some of the offers made in his stores as they don't suit everyone.

It is necessary for businesses to make a profit in order to reinvest but there is a big difference between making a fair profit and making the most that you can. Is the first aim of company directors to make the most profit for their shareholders or a profit which will ensure that the company continues to be viable into the future? Customers are important too, with the rest of the community needing at least a little consideration occasionally.

I don't think the unfairness claim can be made against more than a small number of the people who run companies -- it just seems like that sometimes.

Worst-case scenario: plan for it

In your business or even in life in general, have you worked out a worst-case scenario? It should be essential but I suspect too many people are unwilling to face the prospect of things going wrong.

Insurance salespeople will encourage you to consider what might happen if you had a fire, but few take it further than that, and the effects are often not those you can insure against.

Several recent reactions to changes in government policies, changes in the dollar exchange rate and surveys showing changes in consumer buying habits lead me to wonder yet again whether many business people ever work out what they'll do if things start to go wrong.

Those good at selling often overestimate their ability to sell -- but worst case is not always a lack of sales. As in the example I gave in the book Success in Store, it is also possible for a worst case to be caused by sales being too good. (Do you have access to funds to buy what you have sold, or, in a manufacturing business, the cash and/or credit to buy the raw materials?)

A lot of this is done with a spreadsheet. Just take the figures a bit further to the extremes. Yes sales in the convenience store we bought were poor, and even our own mishandling of customers might have been unable to make them worse, but what if road works started in the street outside and took way longer than were planned? I've seen that happen to others, and after putting off the staff and allowing for the lack of a need to buy stock, the overheads were still at a level which drew on all resources. (In the case I'm thinking of, the local authority was prepared to make a substantial contribution to promoting the strip shopping area when the work was done, but the businesses still had to get through to that point.)

The advertisement rate calculator included with my book How to Start and Produce a Magazine or Newsletter makes it easy to work out what would happen to income if a periodical publisher found all orders coming in for full pages instead of a mix of small and medium ads. But that is the kind of calculation which should be done with any business. I'm sure you've heard the joke about the business owner who admits that they are losing a dollar on every sale "but we make up for it in volume".

Retailers in Australia are currently trumpeting the benefits of a high dollar in lowering prices on imported goods, especially electronics. But have they worked out what they'd do if, over say a three or six month period, the dollar conversion rate dropped to half its present level -- which was where it was only a few years ago.

Computer retailers used to stock computers. Now few do outside of the demo stock on the floor. Not only did they learn to cope with price fluctuations but also with continuing upgrades in specifications. But a lot of stores went broke or closed because it was just too hard to cope.

In another field I went through some basic costings with a couple planning a restaurant. If successful it would have been a goldmine, but the most likely scenario was that they would be working their butts off for less than a living wage. Then I discovered that none of their forecasts included the cost of borrowing the admittedly fairly small sum they would have needed to get started. So, unless they started with queues outside their door on the first days they would have been going backwards slowly but certainly.

So think now of what could go wrong, and what effect it will have. If you cannot cope with that, you will be unlikely to cope with success.

Changes in the way data is stolen

Some interesting facts in the latest Verizon Data Breach Investigations Report, which, for the first time, for 2010, was a joint report by Verizon and the US Secret Service.

This applies only to breaches within the USA of course, but there are still some lessons for us all.

Firstly, of 84 "confirmed breaches of data security" investigated by the US Secret Service, 66% led to arrests. Not all got the publicity of Albert Gonzalez who was sent to jail for 20 years in March this year for stealing more than 90 million credit and debit card numbers. In fact some received no publicity at all as the companies from which the data was stolen were loathe to have their problems revealed.

Most thefts happened in-house: rogue employees such as programmers were involved in nearly half the cases, but they involved only 3% of the records stolen. In other words, the inside jobs were amall jobs. But the report warned about outsourcing:  "Organizations that outsource their IT management and support also outsource a great deal of trust to these partners."

And there was not a single case involving a foreign government.

SQL database queries were used in more than half the cases: programmed queries that pluck data from the system and send it to the requester. This is a bit like the queries you can set up in Access or the old DBase. It seems to mean that the real problem is in the programming used by a vast majority of businesses.

Keyloggers, the programs that record what users are entering via the keyboard, and which can be hidden in other programs or installed without the user's knowledge from compromised websites, and which are often used to scare users, accounted for only 1% of the stolen data -- down from 80% the year before. So the bad guys have found better ways to steal the info.

And what of the other big scare tactic: keep updating or you'll compromise your computer? Well, Verizon and the Secret Service could not come up with a single case which "exploited a patchable vulnerability."

One wonders however whether companies are keeping as close a watch on their data as we might reasonable expect. The report states: "Third-party fraud detection is still the most common way breach victims come to know of their predicament".

As Woody Leonhard states in the Windows Secrets newsletter: "Companies learn of breaches when customers report them. So if you think your data's been stolen, holler yer head off!"

Make sure you get paid on time

Being successful in a small business is not just reliant on making a profit on whatever you sell, whether it is goods or services. It relies also, and perhaps more importantly on getting paid for those goods or services.

I was surprised yet again this month to come across a small business owner, in this case a freelance designer, who had not thought to set out clearly just when he expected to get paid and ensuring that was understood by his clients.

He wondered whether he should offer a discount for payment at 10 days or 30 days. That, I suggested, would just mean he would be giving a discount to his current prompt payers and encouraging others by suggesting he was prepared to finance their debts to the extent of 30 days which could be attractive compared to bank overdraft costs. He also needed to make sure that he got invoices out immediately a job was done, and certainly not wait until the end of the month (and sometimes into the next month) as he had been doing.

Long ago I established a simple system with my clients: no job would be started until the previous one had been paid for. I did have a couple of exceptions for weekly jobs but on those there was a date for payment each month which I had got from the client and no future job would be started if that date went past without payment.

When you have your own debts it may seem hard to seemingly pass up the chance of more work, but if you are offering fair value in what you do you will find that clients will keep to agreed terms when it is in their interest. Those who do not may not be worth working for; it is no good doing work for which you will never be paid, or paid so slowly that extra costs in chasing payment eat away at all the profit and do not return your own expenses in doing the job.

Part payment should be normal in advance on first orders. In my experience as a publisher, most book printers now work on half payment in advance and the rest before the finished job is despatched. One large printer told me recently that is what saved them in the recent global difficulties.

Faced with such payment terms from printers I can understand that some publishers will be trying to delay payments to other suppliers ... will you be one of those?

In search of funding

Maybe it's a little out of the normal run of production problems, but I had a reader recently point out that one of the major production problems for a small newspaper can be to have the funds to go on producing the paper.

That's a good point. I have come across newspapers that have received arts council and local education grants for things like running an arts page or a page (and sometimes a lot more) for one or more local schools -- especially if they involve the students doing most of the preparation work (I've been paid a few times to go along to schools and explain how a newspaper is put together).

I've also seen schools and other organisations divert funds they used to produce a newsletter to a newspaper which agrees to run a regular column.

However, in general, appeals for "support" don't seem to work in the long term -- much better is to encourage people to show their support by placing paid classifieds whenever they have something to say, something to sell, or someone to thank.

For a local publication, or one which serves a very specialised field where a number of people agree that they would lose substantially (either economically or socially) if the publication ceased, there could be an argument for a "Friends of ..." organisation that maybe gives some benefit such as discounts of some kind that don't cost the publisher anything.

You can also chase local politicians for inclusion on government advertising budgets, though this money seems to be getting much harder to get.

I have to admit that this isn't covered in any great depth in my book How to Start and Produce a Magazine or Newsletter although that does cover  much about setting ad rates, selling ads and considering the general economics of publishing.

Email: the world will know

One of this country's senior politicians has just found that emails may not be what they seem. In particular a forwarded email may be changed easily before it is forwarded. That should be a warning to everyone who uses email.

To start from the basics: There's a simple Law of Email, which states "Never send anything that you wouldn't want the whole world to know".

They are easy to copy, easy to change, easy to get out of even secure offices since the introduction of USB sticks, which has led some companies to disable the USB ports on their computers, a method which causes more problems than it solves.

Encryption should be used if you are sending confidential information by email, but encryption does not assure security since it has to be decrypted at some stage ("Decryption" rather than the unencryption which I've seen many times). Emails may be decrypted on the main mail server which offers little security within an office.

There are better ways, one of the simplest being to create a PDF of a document, encrypt that and sign it digitally. Warning: simply requiring a password to open a PDF is not securing it; a Google search will reveal programs that will ger around that (which I've needed to do to get an ad into a magazine that was secured by a foolish designer).

If you have this kind of material then you'll need to study the Acrobat help files. There are also some examples of commercial software programs that will make it a simpler task.

On the other hand, there are authors and others who are so scared of someone stealing a single copy of their ebook that they make access difficult for the people who have paid for the file. I would quote from my own experience when running a milk bar/convenience store. If you put a box of lollies on the counter they will sell, but a proportion will be stolen -- move them to the back or anywhere where the customer cannot easily pick them up and they stop selling. There will be a point at which theft is too great but it will always be worth losing a few.

It can also reflect on the trust between a business owner and his customers. In my book Success in Store there are two examples of the relationship between my wife and some local high school students who came regularly for fish and chips. In the first, they left wrappers and cans by the seats on the footpath until one of them saw my wife go out to clean up their mess as they left. "Do you have to do that?" one asked. No one else will do it, she said, and from that day there was no more mess; everything went in the bins.

Similarly, a sheepish youngster returned to hold out a confectionary packet, saying he'd forgotten to pay. Next day one of the other students asked if he'd returned to pay. "He told us on the way back to school and we said 'you don't do that there'."

Fair dealing will do a lot to reduce problems of theft but that does not help with the general continued availability of email and its likelihood to spread far beyond its original intended use.

A recent search for my name in Google, and going far beyond the first two or three pages where most of us stop searching, came up with an email I wrote in 1996 which is 13 years ago, long before the Internet was anything like it is today, and in the earliest days of the web when many exagerated claims were being made about "hits" on web sites. If you are interested, that email is at http://open4success.net/Olnews/mbox2/282.html

That was not the start of email for me as I'd already been using it for the best part of a decade; at that time the problem was that there were not many people you could send emails to but I did use an email-to-telex service to submit articles to some publishers.

In all that time, there have been regular warnings that normal email is the least secure communications system of all. At least with phone recordings you can be fairly sure that what is heard is what you said, and there are legal safeguards on what can be used. With email, forgery is simple, and preservation and distribution is even more simple.
 

The biggest typo of all

A typo is a typesetting error, and Typo is a book about the biggest typesetting error of all time. The Full title is Typo: The last American Typesetter or how I lost 4 million dollars. And actually, on the cover the subtitle is typeset as “...or how I made 4 million dollars” but made is crossed through with the common handwritten correction mark for delete and above it is the insert mark and the word “LOST” is written in. That has led to the book being listed on Amazon as Typo: The Last American Typesetter or how I made & Lost 4 million dollars. It is appropriate that such an error creeps in. This is a true story in as much as it is author David Silverman’s account as one of the two people who borrowed to buy the Clarinda typesetting company at a time when the industry was going bad. He and mentor Dan Coyne were sure they could save not only Clarinda but by taking over the rest of the industry in the US and combining work in the US with outsourcing to Manilla they could stave off the disappearance of US typesetting to India. It almost worked, and might have if they had not had to deal with publishers and their own staff. This is not just a book for people in the printing and publishing industries -- it has lessons for anyone who runs a business and especially anyone who has ever moved in to an existing enterprise as “the new boss”. I can sympathise as David deals with situations such as the internal financial controller who just refuses to introduce new systems and makes sure that anything new does not work. As the new manager of a newspaper I had an office manager who almost every night, as I found out later, was phoning the owner to ask “has Gordon the right to do that” and similarly making sure new methods always  seemed to fail. David faced the same reluctance to sack anyone, let alone people he suspected were refusing to co-operate in any efficiencies. And there were inefficiencies galore. A woman was employed to check every laser printout of an online file with the original printout from the publisher because years ago laser printers would sometimes substitute Courier for some typefaces. Then the printout pages were numbered with one of those old fashioned numeric stampers because a printout could be dropped on the floor and they’d have to recollate, despite that having happened once in several years (and would take maybe an hour or two to put right). Even worse, should that woman be away, a senior typesetter would take over her job leaving them one down in the only department which might have been making money. The IT technician certainly installed the new 100MB network cables, but connected only four wires at each device, so that the system continued to run at 10MB (a new tech was amazed that it had worked at all). A fireproof storage room contained Syquest disks from the 1970s while current backup tapes lay on the floor outside. A fireproof filing cabinet was empty save for a key which did not fit anything they could find. The litany of these things covers three pages which every company tech and director should read even if they ignore the rest of the book. (Do a search on “rubber bands” in the look-inside section on the book’s Amazon page). Such items from David’s experiences make for a laugh but I’ve seen such things and I’m sure they are true for many, many businesses today. Then there were the publishers who refused to send work if it might be outsourced to Manilla despite being almost sure that other typesetters they did use are subcontracting to India. There’s also a slowly dawning realization for David that although their Manilla office seems to be the only section making a profit, it is still a high cost operation compared to India. You’ll know so many of these people: the salesman who persuades a client to phone threatening to take away their work if the salesman is sacked who David has to tell has not given them any orders for two years. The meals booked as expenses which turn out to be meals for one. The manager who keeps a van driving daily between offices long after all urgent work has gone electronically. But all these problems surfaced only when it was too late. In the early stages the new owners were intent on the big picture, increasing sales -- unable to get from an ancient accounting system the facts such as that for every extra book put through the typesetting system at even the most efficient of their US offices was losing money. The only profit source seems to have been corrections because of high fees and a hit-or-miss system which meant that invoices bore little relationship to the actual work. Typo: The last American Typesetter or how I lost 4 million dollars, by David Silverman, published in the US by Soft Skull Press, 2007 and in Australia by Scribe Publications, 2008. For more info and extracts including videos see http://agman.com/