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All you believe…may be ALL WRONG – Belief #4

Misconception #4 – It is better to ‘Bootstrap’ than to borrow or wait until we make enough profit and keep capital investment low.

(Read time approx. 3 minutes.)

This is the fourth misconception in a series of six. The concepts being discussed here will likely be counter to your beliefs. The comments left on the previous posts are quite interesting so you may want to go back and read them. Click HERE to go back and begin with the first post related to this series.

Don’t get me wrong. I’m all for frugality, living within your means, and saving money where it doesn’t compromise quality. But when it comes to investing in an income producing business being frugal for the sake of being frugal can put a lid on income and profitability. It is a hard economic reality that the number one cause of business failure is under-capitalization. No business will ever outperform its level of capitalization.

There are several major reasons people in our industry are often led to invest less than they should in their business:

  1. Under-capitalized passion meets unknown real needs. A passionate for horticulture is often matched with a lack of understanding of the principles of business and how those effect the outcome of our business investment. it is common to try to do more than we should with what we have to work with. For example, trying to sell gift items in a greenhouse defies all retail merchandising logic and also typically increases inventory expense, slows product turns, lowers margins, and results in lower profit. There is nothing left to reinvest in improving the facilities to make more money from the core product plant categories.
  2. It is easier though not less expensive to pay to operate rather than to pay to own. There are often additional monthly costs related to heating, cooling, and repairing older and less expensive facility. When these costs exceed the additional monthly payment on a more energy efficient facility profit drains from the P&L. There are other hidden costs to be considered as well. An inefficient facility will require more labor to use. Perhaps the most critical factor will be the marketability of the facility and the capacity to produce income. However, it is still easier to accept status-quo than it is to think and plan to develop a more effective facility.
  3. Fear of THE BANK. There is a feeling of intimidation, a natural aversion to dealing with a bank that keeps plans smaller than they sometimes should be. Having a realistic expectation of the potential of the business, the facilty requirements to take advantage of the opportunity, and the knowledge, wisdom, and patience to generate more profit to increase borrowing power.

I have one client who was complacent with their situation. Their growth rate was rapid because the community was under-served. Being happy with the growth they ignored the opportunity to invest more in a facility better matched to their opportunity. Meanwhile, a competitor who was not complacent saw the potential in their market and built a new garden center nearby. The competitor had established strong banking relationships, planned well and borrowed the money to build a multi-million dollar facility from scratch on raw land. The competitors new facility commanded attention and handled the pent up consumer demand in the marketplace. In addition, the new facility offers an expansive parking lot, is perceived by customers to be offer entirely covered shopping during inclement weather, has efficient receiving docks, and is shopper friendly because the site was leveled prior to construction, Looking backward, the owners of the smaller garden center recognized that they lost all opportunity for future growth of their business because the new competition clearly leap-frogged their potential. Their only potential for growth is to either add another location, or to relocate in another yet under-served market.

New Belief #4 – The size and financial health of a business is in proportion to the capital invested in it.

Begin With Smaller Thoughts

My advice is always to make money to grow, rather than grow to make money. This means that you should first figure out the opportunity to increase profits in your existing business so you generate additional cash flow and net profit to reinvest in further improvements.

A few small improvements to consider:

  1. Cinder blocks and pallets cost more to own because they cost more to move (therefore they don’t get moved when they should). They also tend to devalue the product displayed on them rather than meet the retail objective of adding value to everything you sell.
  2. Cheap looking inventory attracts cheap customers and repels higher income customers. When the buying budget is spread across too many product categories and items there is often no clarity to the customer. Instead choose categories where you can command expertise in the marketplace. Choose items that inspire customers rather than trying to carry a little bit of everything.
  3. Invest proportionately in your marketing. Word of mouth is the most effective form of marketing, but poorly located garden centers go broke waiting for enough word of mouth to happen to make money. If you are in an out of the way location marketing is much more difficult and expensive than if you are in a high traffic location. Get over it and get on with it.
  4. Eliminate bottlenecks that cause your business to under-perform its potential. Begin with your checkout lines. When customers stand in line you lose big time. A customer in line is deciding whether they have time to come back in the future. Even if they might have come on your slowest day of the year they are picturing that line they will have to waste time in. They are also thinking about how dumb it is that your checkout process is so slow and causes them misery. And they are plugging up a parking space another customers could be in.

This is a simple view of a complex but common business problem. Take time to consider if the problems of your business are related to inadequate capital investment. This is a situation that can only be improved by specific actions, not a “good season”.

4 Responses

  1. […] This post was mentioned on Twitter by Sid Raisch and Sid Raisch, Management Gate. Management Gate said: All you believe…may be ALL WRONG – Belief #4 http://cli.gs/H9JzU […]

  2. […] This post was Twitted by sidraisch […]

  3. Sid sounds like you’re talking to me. After your day with Kim she shared your plans I’m excited to see them progress to this. As always we come back to location. We’re trying to think of changes to attract more passing traffic. The other country shop moved to Maysville so it can help or hurt us. People not coming across the river.

  4. Thanks for commenting Sue. There are many other people also thinking I was talking directly to them. (And sometimes I am ;-). The old adage that it takes money to make money IS true. Whether through initial investment, reinvestment, or a gift capital is always required and any business will languish if it tries to outgrow its capitalization. One person invests the same amount of money and effort in one place as another does in another place and each gets very different results if nothing is different but the passing traffic. That doesn’t mean that it can’t be overcome, but the investment required is much different. The other adage is also true, “location, location, location”.

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