Most of the entrepreneurs we interviewed in our consulting business have an unrealistic conception of what excites and disappoints investors. The dream of many inexperienced inventors looking to finance their opportunity is to build substantial infrastructure. Your business plan identifies the need for factory space, equipment, personnel, and many other fixed costs.
Investors want to see a plan that maximizes return on investment. High fixed costs are enemies of a large profit margin. When business goes down, and it always does at some point, fixed-cost assets become liabilities and must be continually nurtured, even as revenues decline.
Always present decision makers with the most simplified plan of operations possible. Don’t confuse grandiose staff and equipment wishes with actual needs. In today’s business climate, almost every possible service can be rented, leased, sold, or performed through contract manufacturing. A 25,000-square-foot factory that is not operating at 100% capacity is a low-performing fixed-cost asset, especially if a private label manufacturer will provide the service at a competitive price. The cost of rent, energy, insurance maintenance, and facility personnel is ongoing and will mean a loss to bottom line.
Investors want to see a lean trade without fat or excess. They will always be open to adding costs as sales growth and traction kicks in. Initially, the entrepreneur must demonstrate that he will be a wise shepherd of the investment required to start the business. Here are some areas where fixed costs can be avoided and potential investors are very impressed.
An opportunity killer is a request for funding that includes money to purchase a facility, office, or plant. No startup can pinpoint the rate of growth (or failure) of a new company with precision. Investors will want to see a plan that reflects realistic goals and space requirements. This almost always means renting facilities until the need demands the purchase of facilities.
There are hardly any good reasons for a startup to make its own product. Possibly if there is a very valuable trade secret involved, but not often even then. All manufacturing contracts must include a Confidentiality Agreement (NDA) as part of the negotiations. Today, contract manufacturing is available and used in almost every industry. Estee Lauder does not manufacture almost any of the many cosmetic or fragrance products that it markets. Liz Claiborne and Calvin Klein don’t make any of their clothes. Ikea only sells furniture made in third world facilities.
All of these companies, and many more, realized long ago that manufacturing was best left to factories located where labor, raw materials, and government regulations weren’t stifling. These companies concentrate their assets in research and development, design, sales and marketing. So should any entrepreneur looking to be successful in securing investments.
Every entrepreneur should be able to aggressively market and sell their product. However, no one person or small association can stand in front of every customer who is potentially interested in purchasing the product on offer. The investor will want to know that there is a sales strategy that offers an excellent opportunity for success.
In the sales area, there are industry-specific sales representatives: manufacturer’s representatives and agencies available to sell an interesting, market-ready product, on commission, within their industry. Commissions are usually standardized within each industry. The gift industry is 15%. Food products are 3% or more, depending on the volume that a product can reasonably be projected to reach. Industrial products are 2% to 5%. Historical profit margins dictate commission rates.
When using sales agents, the employer must manage the sales force as if they were salaried employees. Weekly calls to review goals, promotions, and upcoming meetings. Write letters and emails pointing out the successful accomplishments of other agents. I have used commission sales agents for many years and recommend them to most of my clients.
I make as many key account sales calls as possible with my sales agents. If it is my product, I want to control the large presentations, although I will pay a commission for the sale that I have generated mainly. I look forward to as many sales meetings as possible. The more I can meet, learn, and know about the activities of my sales teams, the better I can motivate, train, and energize them.
When commission sales agents don’t sell a product, they don’t get paid. Obviously this minimizes fixed costs. However, you will want to pay as much commission as possible. Healthy commission controls mean a very healthy sales base.
As a National Sales Manager for Vidal Sassoon Hair Care Products, at a very young age, I was faced with a problem. Our sales had skyrocketed. The growth was so rapid and the market acceptance of the Vidal Sassoon brand so overwhelming that our commission payments also accelerated to the point where my senior management was upset when the commissions exceeded their own salaries. “Don’t those guys work for us, why do they earn more than the owners,” they asked?
I faced a difficult situation. I offered two options: cut commissions or lay off commission agents and hire a company employed as a sales force. I calculated that if you could get sales coverage for 8% of the cost of sales (including wages, benefits, travel, etc.), it would make sense to transition. Lowering the commission rate would displease the agents and I didn’t want to risk losing the excellent momentum we had built.
Very surreptitiously and quietly, I interviewed and hired a team of key regional sales managers and we quickly executed a conversion plan that senior management had approved. Vidal Sassoon was at the point in his business development where a company-owned direct sales force was needed and justified. However, it was a concern as we were increasing our fixed overhead considerably.
Entrepreneurs should focus maniacally on sales growth. Sales is job no. 1 in all companies, especially in a new company! Take great care in building sales coverage that supports your projected growth without choking cash flow with a very high cost of sales.
Hopefully, the entrepreneur, or a member of the management team, has a background in marketing. If not, the answer is usually to hire a consultant. An experienced consultant will save time, money, and mistakes. Make sure the consultant you are considering has current industry-specific experience, strong references, and a transparent track record of success.
I never recommend that a new company handle its own logistics (warehousing, picking and packing, shipping, billing, etc.). Dealing with the shipping, handling, conditions and terms necessary to satisfy retailers is overwhelming. Large stores like Kroger, Lowes, and Wal-Mart have extremely complicated inventory control systems. Special and very expensive software is required to communicate and expedite the receipt of goods.
On average, I can store, pack, and ship my inventory for about 4% of my sales price (based on volume). If the business is seasonal or slows down, I don’t have to pay high fixed costs, just a percentage of the total bill amount for shipments. If business is booming, my contract fulfillment warehouse ramps up hiring. A good contract warehouse offers a full menu of services that I can choose from as needed. Your systems will be sophisticated enough to handle the most demanding buyer of my product.
The first-time reader of a business plan generally has a strong reaction, positive or negative, to the overall document. A negative result usually occurs when the Executive Summary contains references to high fixed costs. A positive verdict is more likely when the entrepreneur indicates in every possible way that he is only interested in maximizing profits and return on investment, not in building a colossal infrastructure that will bleed the company if everything does not progress perfectly and is not they meet the assumptions.