Welcome to the second lesson in my occasional series, 5 Lessons I didn't learn until I ran my own business.
Lesson 2: Flexibility is far more important than you think
In the early days of my business, I wanted to make sure I had all of the building blocks in place for the business I wanted in the future. In many cases I made long term commitments to keep the costs down so that I would have a greater share of the income that would eventually come in. This is really faulty logic!
When sales weren't as anticipated, I still had these monthly overheads to cover, whether or not there were any sales - each month leaving me less and less room for manoeuvre. Instead of being able to focus on growing the business, you find yourself focussed on short term sales to feed the overheads and survive until next month.
If I was starting out now, I would focus on trying to make as many costs as possible variable rather than fixed (even if this means that the rates you actually pay are higher). Once you have a proven regular level of sales, you can revisit these and maybe make some longer term commitment to keep the cost down. But if you do, make sure this works for the minimum level of sales you can expect, keeping the flexibility for sales above this.
Ways to stay flexible:
Employees - Where possible use temporary staff, paid by the hour, or outsource to experts by the day as needed. Employ sales people on a commission-only basis or at least with a high commission element to their package.
Stocks - Look at sale or return, or consignment stock arrangements so that you only have to pay for stock you sell. Operate a Just-in-Time approach with suppliers to minimise stock holdings.
Premises - Look for easy-in, easy-out options on offices or workshop space, ideally with a one to three month notice period, so you can flex for the space you need, rather than be tied to the space you've committed to.
Capital purchases - Do you really need that capital item? If you do need it, could it be bought second-hand? Can you pay for it out of cash and avoid a monthly lease commitment? If this is not feasible, try to ensure that there is an exit route, e.g. that the outstanding finance will remain below the resale value, allowing you to get rid of it by stopping the payments.
Vehicles - Although these should be covered by Capital purchases above, I think they deserve a mention on their own. The question, "Do you really need it?" should be asked at least ten times before committing to a vehicle lease in the early days of your business. This is probably the easiest way to take on large monthly commitments that bring little benefit to the business. Trust me, I learned the hard way. You're only kidding yourself when you say the flash car is necessary to bring the business in. Clients/customers are unlikely to be impressed and will more likely drive a hard bargain as they think your margins can stand it.You are buying it because you want to - there is no business case. You need a reasonable car to get you around. When you are making the money, you can get the car you want.
Remember, if you have a 20% profit margin, for every £100 monthly overhead you commit to, you now need to sell an extra £500 to break even! And remember break-even just means earning nothing!
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