Experiences From The Storefront

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Do you have enough money set aside to take your business through the first 12 months of operations?

A common mistake made by small business owners is focusing on the cost of opening the store and not setting aside the money needed to actually operate the store once it is up and running. Last week I received a call from a broker trying to raise money for a client. His client had spent several hundred thousand dollars building out her store and did not have enough money left to actually open the store.

Entrepreneurs are by nature optimistic. That optimism leads to overestimating how much we can do ourselves and underestimating what it really costs to open a retail business.

Below are a couple of rules that rarely fail in business:

Rule 1: It’s going to cost more than you think. Put together your cost estimate based upon all of the work being completed by others at market rates and then add a contingency factor. Then add 20% on top of that as a reserve.

Effective project budgeting is generally hampered by two things. 1) Believing you are going to reduce start-up costs by doing the work yourself leads to underestimating the real cost of starting the business. 2) Raising money for a start-up takes time, effort and exposing oneself to rejection.  Because no likes to be rejected the tendency is to raise the minimum the business owner thinks he can get by with.

It is much better to go through the rejection and raise all of the money including the reserve than get the down to the finish line and then have to find the money to get the store open and keep it running.

Take your worst case estimate of the costs, add the 20% reserve and raise the money up front. When your store is up and running you will be happy you did.

Rule 2: It’s going to take longer than you think: Project timelines get distorted by the reality of getting people to do the work. People work to their schedules and not to yours. That goes for the people in government issuing permits, as well as, the people you are paying to work on your project. Time is money. The longer it takes to get the store open the more it costs you both in actual dollars spent and lost revenue. Build your timeline based on what it will really take to get your plans drawn, obtain all of your permits and build out the store and then add 20% beyond what you think will take to get the store open.

The 20% reserve you build into the budget and the timeline are for your use only. If the people working for you know about the reserves they will work toward the last possible date to complete the work and will use the entire amount of money they know you have available. Establish the reserves and keep them to yourself.

Finally, develop the budget in two parts. The first segment is for the construction and outfitting of the store. The second segment is the budget for operating the store. Set aside the money in the operating budget in a totally separate account and do not touch it until the store is actually ready to open. If you see that you are going to overrun the construction budget go back and raise the additional money you need. The operating budget is for operating the business.

To successfully open a retail store front business raise more money than you think you will need; budget more time than you think it will take; keep your operating capital separate from your start-up capital and keep all of this to yourself.