I spent some time talking to several local retail business owners a while back. A small candy store, a store selling childrens' items from around the world, a wood/pellett stove store and a brand new restaurant, were among the businesses I visited. Each one had a really nice owner, a well maintained store and good inventory. Each one was struggling when I met them.
We met because I was looking for space to start a little business idea that I had at the time. When I put together my first pass at a business plan, I determined that I could not pay too much for rent - so I set out to talk to some local businesses to see how they got started, what rents were like in different areas and, in 2 cases, to see if someone might want to share a space and therefore really keep expenses down (my business idea was related to kids, so may have fit in with the toy or candy lady).
What I found through these discussions was that many of these business owners never really put together a plan. "WHAT?!" - you may gasp. "No business plan?" NOPE.
One woman told me "I wish I had done something like that before I signed this lease". Of course she did! She was actually leaving her space for something more affordable and going to pay both rents for a few months so as not to loose the opportunity to lease the cheaper space (off the beaten path). I heard the exact same story at the international toy store. The stove store owner was regreting his decision to expand to this second location and closed up shop shortly after we met. We had discussed the space next to his that was for lease (he told me to stay away from that building - lousy landlord and more expensive than it was worth). I already knew that - I had done the math.
So, believe it or not, people start businesses without a plan. They don't even put together some basic numbers to see if they are going to be capable of paying their bills. They didn't determine how many dozens of toys and books they would have to sell each day just to cover their costs. They did not make the simple calculations that would tell them how many thousands of chocolates would have to be sold each month just to pay the bills. The restaurant needed to have at least 40 people buy a meal every day, but did not have a plan on how to bring in that many people.
For every one of these, and several others that I have spoken with, a simple calculation would have told them not to sign those pricey leases, to find an alternative or at least think through plans more thoroughly.
As of now, the toy lady closed up shop and sells through homeschool networks. The candy shop is closed too, but sells mail-order. The restaurant is actually doing better, after a really tough couple of years.
So, the lesson here... even if you self-finance and you are excited about your business and you just know you can make it work - do the numbers. Add up your monthly expenses - rent, utilities, insurance, payroll, advertising, etc. Then consider your product costs vs. selling price. Given just those basics, how many items will you have to sell to cover your costs every month? Then translate that to how many each day or week. Now, think about that number carefully - is it reasonable? Is it achievable?Chances are that you could get 10-20 customers to buy every day - but could you get 40? 50? If that is the magic number - re-think your plan. Oh, and don't sign that lease quite yet.
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