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Keep Business Operations and Logistics Simple, Streamlined and Agile
Most of the entrepreneurs we interviewed for our consulting business have highly unrealistic notions of what excites and disappoints investors. The dream of many inexperienced inventors looking to fund opportunities is to build substantial infrastructure. Their business plan identifies the need for factory space, equipment, staff, and many other fixed costs.
Investors want to see plans that maximize their return on investment. High fixed costs are the enemy of large profit margins. Whenever a business goes down, at some point a fixed cost asset becomes a liability that must be continuously supplied even as income declines.
Consistently present decision makers with the most streamlined operational plan possible. Don’t confuse overstated staffing and equipment needs with actual needs. In today’s business environment, almost every possible service can be rented, leased, contract manufactured or manufactured to order. A 25,000 square foot factory that isn’t running at 100% capacity is a poor performing fixed cost asset, especially when private label manufacturers offer their services at competitive prices. Rental, power, insurance maintenance, and facility staff costs are ongoing and weigh on the bottom line.
Investors want to see lean and lean operations. They are always open to adding costs as growth and sales traction begins. First, entrepreneurs need to show that they are wise shepherds of the investments required to launch a company. Here are some areas where fixed costs can be avoided and potential investors have been greatly impressed.
An opportunity killer is a request for financing that includes funds to purchase a facility, office, or factory. No startup can accurately pinpoint the growth (or failure) rate of a brand new business. Investors will want to see plans that reflect realistic goals and space requirements. In most cases, this means renting the property until you purchase the property as needed.
There are few good reasons for startups to manufacture their own products. Possibly when very valuable trade secrets are involved, but even then it’s not. All contract manufacturing must include a non-disclosure agreement (NDA) as part of the negotiation. Contract manufacturing is available and used in almost every industry today. Estée Lauder makes very few of the many cosmetic and fragrance products we sell. Liz Claiborne and Calvin Klein don’t make apparel at all. IKEA only sells furniture made in third world facilities.
All of these companies, and many more, realized long ago that manufacturing is better left to factories where labor, raw materials, and government regulations are less stifling. concentrates its assets on research and development, design, sales and marketing. So should every entrepreneur trying to get investment successfully.
Every entrepreneur should be able to actively market and sell their products. However, no one person or small partnership exists in front of all customers who may potentially be interested in purchasing the products on offer. Investors will want to know that there are marketing strategies that offer a greater chance of success.
In the area of sales, we have industry-specific sales representatives. Manufacturer representatives and distributors can take consignments within the industry and sell interesting products that are relevant to the market. Fees are usually standardized within each industry. 15% in the gift industry. Food is 3% or more depending on the amount the product can reasonably be expected to achieve. Industrial products are 2% to 5%. Your past profit margins determine your commission rate.
When using a sales agency, entrepreneurs have to manage their sales force like an office worker. Weekly calls to review goals, promotions and upcoming meetings. Write letters and emails pointing out the successes of other agents. I have used Commission Distributors for many years and recommend them to most of my clients.
I make sales calls for as many key accounts as possible with my reseller. If it’s my product, I’ll mostly be getting commissioned for the sales I generate, but I want control over the big presentations. The more you can know, learn, and learn about your sales team’s activities, the more you can motivate, train, and energize them.
Commissions If the distributor does not sell the product, they are not paid. This obviously reduces fixed costs. However, you will want to pay as much commission as possible. A healthy commission check means a very healthy sales base.
As a very young National Sales Manager for Vidal Sassoon hair care products, I faced a problem. Our sales exploded. Growth has been so rapid and the market acceptance of the Vidal Sassoon brand has been so overwhelming that our commission payouts have likewise accelerated and when our commissions exceeded their salaries my top management was upset. “They aren’t working for us, so why are they earning more than their owners?” they asked.
I faced a difficult situation. I presented her with two options. Either cut commissions or fire commission agents and hire a company to hire sales people. I figured if I could get a sales compensation of 8% cost of goods sold (which includes salaries, benefits, travel, etc.), it would make sense to move. Lowering commission rates would make agencies uncomfortable and I didn’t want to risk losing the excellent momentum we had built.
Very stealthily and quietly, we interviewed and recruited a team of sales managers in key regions and quickly implemented a transformation plan approved by top management. , was in the justified stage of business development. However, it was a concern as fixed costs were increasing significantly.
Entrepreneurs must maniacally focus on growing sales. Sales is the number one job in every company, especially in new ventures. Be very careful in building a sales range that supports the growth you anticipate while not choking your cash flow with very high selling costs.
Hopefully the entrepreneur or management team member has marketing experience. If not, the answer is often to hire a consultant. An experienced consultant saves time, money and mistakes. Make sure the consultant you are considering has current industry-specific experience, strong references, and a transparent history of success.
We never recommend new ventures handle their own logistics (warehousing, picking and packing, shipping, billing, etc.). Handling shipping, handling, terms and conditions necessary to satisfy retailers is difficult. Large retailers such as Kroger, Lowes, and Wal-Mart have very complex inventory management systems. To be contacted and to receive the goods quickly, special software is required, which is very expensive.
On average, you can store, pack, and ship your inventory for about 4% of the selling price (depending on quantity). If your business is seasonal or slowing down, you don’t have to pay high fixed costs. A small percentage of the total invoice value of the shipment. When business is booming, my Contract Fulfillment Warehouse increases hiring. A good contract warehouse will offer a complete menu of services to choose from based on your needs. Their system is sophisticated enough to handle the most demanding buyers of my products.
People reading a business plan for the first time usually have a strong positive or negative reaction to the document as a whole. If an executive’s summary includes references to high fixed costs, negative results usually result. Entrepreneurs in every possible way are only interested in maximizing profit and return on investment and not building huge infrastructures that will starve the enterprise if everything does not go perfectly and the assumptions are not realized. , you are more likely to get a positive verdict.
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