In her latest video blog, Marcela of Rico Mexican Kitchen asks questions about business finance.
Marcela in Fishbowl Two has never started her own business before. Nor has she seen anyone else start a business. And, being one of the first businesses to feature on inafishbowl.com, she has never had the opportunity to learn from the experiences of others.
In this video, Marcela asks how the finances of early stage businesses usually work during the first two years, and how she should be going about raising more finance.
You can find out more about Marcela on the new interactive business website www.inafishbowl.com
Last month we talked about starting a business on very limited resources. This time, I would like to think about the problem of having too much time or money.
Having too many resources can distract you. In contrast, when money is tight, you’re focused on just doing what is truly important. In any start up situation, you should only care about discovering two things:
Cracking the above two points and then becoming cashflow positive is the surest route to business success. Failing to focus on this is the surest route to failure, whatever the bank balance. I speak as someone who has not only started their own company, but who has invested in a variety of start ups, some with tremendous success, and one that has been an abject failure.
Two of my investments (actually the ones with the most potential and both of whom have raised millions), are also teetering on the brink of failure. The reason? Too much money, with one having raised more than £10m over several funding rounds. Having too much money encouraged both to try and tackle multiple markets before they had fully established themselves in one. It made them feel that becoming cash positive was an optional extra. After all, they could always raise more capital. And they seem to pay enormous salaries, far above what I pay for higher caliber staff in my own business.
In my opinion the lesson is simple. Focus your efforts on providing what is wanted. Then deliver it at a profit. Don’t do anything else. Becoming profitable as fast as possible makes long term success much more likely.
Margin is probably the most crucial figure in any business. Tell me your turnover, your margin and your running costs and within seconds I can tell broadly whether your business is a triumph or a disaster.
In the past, I was obsessed with mark up. It sounds great saying product X is marked up 1,000 per cent and this one 500 per cent, but it doesn’t provide the immediate overview that margin does.
Margin is basically your gross profit as a percentage. This means you can quickly work out your gross profit on any amount of sales – which you should do every day.
How do you calculate margin? First work out your gross profit, which is selling price minus costs. Then simply divide this figure by your selling price and you’re left with your margin.
I run Karacha.com, an online shop that sells musical instruments. So, as an example, if I sell a violin for £200 that costs me £110 to buy from the manufacturer, my gross profit is £90. If you divide this by my sales price (£200), my margin is 45 per cent.
So what makes this margin number so important? Well let’s assume your margin is the same across all products and the business costs £200 to run per day, that includes a wage for yourself, rent, electricity, etc. Secondly, let’s assume your business sells £300 on Monday and £650 on Tuesday. This is where the margin comes in.
Whatever your margin figure is, stick a zero and a decimal point in front of it, so for 45 per cent it would be 0.45. Now grab your calculator and hammer in 0.45 x £300 and you should get £135.
This is your profit for the day before daily costs. Previously, I said the business costs £200 a day to run, so unfortunately you have a loss. But do the same for Tuesday 0.45 x 650 = £292.50. On Tuesday you can pay your £200 bills and have £92.50 profit left over.
By knowing what you make on a daily basis you can make the necessary adjustments to ensure you make a good profit every day.
Turnover is vanity, profit is sanity
Too many people are scared off by the calculator – and businesses suffer because of it. As long as you know your margins, you’re always just 30 seconds away from a quick and accurate assessment of your business.
You could be selling £10k a day, think you’re the absolute dogs you-know-whats, but be making no profit. Every day, multiply that sales figure by your margin and see what you’ve actually made (don’t forget to take away your costs). It’s absolutely crazy, the amount of people who do not know their margin and therefore their daily profit, but can quote their turnover for the past 12 months.
Final thoughts. High costs and low margins lead to disaster: high margins and low costs could lead to a lovely yacht in the Caribbean. Good Luck.
Starting up a business is always going to be tough and like many things in life, there’s probably never going to be a perfect time to take the leap and launch your idea. For many entrepreneurs, one of the key concerns is acquiring funding to turn your dream into a reality. Doug Richard says that one of the best ways to fund your start up is to seek investment from one of the three Fs – Friends, Family and Fools.
Many people are reluctant to enter into business with friends. What has your experience been? Would you advocate mixing business and friendship?