Keep business operations and logistics simple, streamlined and agile

Most of the entrepreneurs we interview in our consulting business have a highly unrealistic conception of what excites and disappoints investors. The dream of many inexperienced inventors looking to finance their opportunity is to build a substantial infrastructure. Your business plan identifies the need for factory space, equipment, staff, and many other fixed costs.

Investors want to see a plan that maximizes their return on investment. High fixed costs are the enemy of a high profit margin. When business fails, and it always does at some point, fixed-cost assets become liabilities and must be continually fed, even when revenue declines.

Always present decision makers with the most optimized operations plan possible. Don’t confuse grandiose wishes for staff and equipment with real needs. In today’s business climate, almost every possible service can be rented, leased, subcontracted, or performed by contract manufacturing. A 25,000 square foot factory that is not operating at 100% capacity is an underperforming 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 staff is ongoing and will be a burden to the bottom line.

Investors want to see a lean trade without fat and excess. They will always be open to adding costs as growth and sales traction start to kick in. Initially, the entrepreneur needs to demonstrate that he will be a prudent herder of the investment required to start the business. Here are some areas where fixed costs can be avoided and potential investors might be very impressed.

Mod cons

An opportunity killer is a financing request that includes money to purchase a facility, office, or plant. No startup can accurately determine the rate of growth (or failure) of a new business. Investors will want to see a plan that reflects realistic goals and space requirements. This almost always means renting facilities until the need dictates the purchase of facilities.

Manufacturing

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 contract manufacturing must include a Non-Disclosure Agreement (NDA) as part of the negotiations. Contract manufacturing is available and used in almost every industry today. Estee Lauder manufactures almost none of the many cosmetic or fragrance products it markets. Liz Claiborne and Calvin Klein do not make any of their clothes. Ikea sells only furniture made in third world facilities.

All of these companies, and many more, realized long ago that manufacturing was best left in the hands of 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. The same should be done by any entrepreneur who seeks to be successful in obtaining investments.

Dirty

Every entrepreneur should be able to aggressively market and sell their product. However, no single person or small association can be in front of all the customers who will potentially be interested in buying the product on sale. The investor will want to know that there is a selling strategy that offers an excellent chance of success.

In the sales area, there are industry-specific sales representatives: manufacturer and agency representatives available to sell an exciting, market-ready product, on commission, within your industry. Commissions are usually standardized within each industry. The gift industry is 15%. Foodstuffs are 3% and higher, depending on the volume a product can reasonably be projected to reach. Industrial products are from 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 highlighting 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 great presentations, although I will pay a commission for the sale that I have mainly generated. I attend 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. This obviously minimizes fixed costs. However, you will want to pay as much commission as possible. Healthy commission checks mean a very healthy sales base.

When I was very young National Sales Manager for Vidal Sassoon Hair Care Products, I faced a problem. Our sales had skyrocketed. The growth was so rapid and the acceptance of the Vidal Sassoon brand in the market so overwhelming that our commission payments also accelerated to the point where my senior management became upset when commissions exceeded their own salaries. “Those guys don’t 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 fire commissioners and hire a company-employed sales force. I figured if I could get sales coverage of 8% of cost of sales (including salaries, benefits, travel, etc.), it would make sense to transition. Reducing the commission rate would upset the agents and I didn’t want to risk losing the great 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 signed off on. Vidal Sassoon was at a point in the development of his business where a company-owned direct sales force was needed and justified. However, it was a concern as we were increasing our fixed overheads considerably.

Entrepreneurs should focus maniacally on sales growth. Sales is the #1 job in every company, especially a new company! Take great care to build a sales hedge that supports the growth you project without stifling cash flow with a very high cost of sale.

Marketing

It is expected that the entrepreneur, or a member of the management team, has marketing experience. 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.

Compliance

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 daunting. Big box stores like Kroger, Lowes, and Wal-Mart have extremely complicated inventory control systems. Special and very expensive software is needed to communicate and expedite the receipt of goods.

On average, I can have my inventory stocked, packed, and shipped for about 4% of my selling price (depending on volume). If business is seasonal or slow, I don’t have to pay high fixed costs, just a percentage of the total shipping bill. If business is booming, my contract fulfillment warehouse increases hiring. A good contract warehouse offers a full menu of services that I can choose from as needed. Their systems will be sophisticated enough to handle the most demanding buyer of my product.

The first time you read a business plan you usually have a strong reaction, positive or negative, to the document in general. A negative result generally 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 dry if everything does not proceed perfectly and the assumptions are not comply.