Thursday, January 20, 2011

Survival Strategy: small business

Some time ago, Global Guerilla, noted that being a small business person was an excellent strategy for survival in coming tough times, because of the opportunity to make so many local connections, etc.  In so many words, I said he was crazy. 

Owning a small business is a great way to go broke.   Only around 20% of them survive to their fifth year.  In many cases running a small business are very similar working a regular job:   where you get paid $1.20 an hour.   If you have a regular 40 to 50 hour a week job, you probably will have more time to add to your network and connections then the small business owner who is staying up late doing the paper work, book keeping, estimating, etc. for the next day’s work.

And people just don’t think through the money end of it, and the volume of money required.  I thought the following was illustrative.

For each cupcake she sells, Ms. Lovely figures she spends 60 cents on ingredients, 57 cents on mortgage payments and utilities, 48 cents on labor, 18 cents on packaging and merchant fees, 16 cents on loan repayment, 24 cents for marketing, 18 cents for miscellaneous expenses and 4 cents for insurance. That totals $2.45, leaving a potential profit of 55 cents on each $3 cupcake.
So far, the per-cupcake margin is going to pay down start-up expenses. She’s been selling the 2,800 cupcakes a month she calculates she needs to sell to cover her costs — she’s taking only a small salary for now — but she says it’s too early to predict when the store will turn profitable, in part because of the economy and in part because she fears losing business to rival cupcake entrepreneurs.
Ms. Lovely is in the process of rebranding the shop to overcome what she calls “a typical rookie mistake” of underestimating “the power and importance of branding and marketing.” She said she had to do more to tell customers that her cupcakes were made from organic, local and natural ingredients.Donald Marron Cupcake Economics

As further illustration, pretty much across the board it has been estimated that to run a successful electrical contracting business you need to generate $100,000.00 a year per field employee.   I have noticed that in other businesses that have similar labor heavy requirements that this number holds up pretty well.

Be careful taking advice from succesful business people.  They are the worst example of survivor bias.  It is often the case that their unsucessful competitors actually used the same strategy, tactics, etc. as they did, and that while their maybe certain necessary requirements common to all, they are not the unique requirements to success.

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