Wednesday, December 5, 2007

To continue: Start with previous post.

Let's say, for instance, that you start your business with 30k in credit. In your first five years, you use up about half that credit, not because you are in trouble but because you are doing so well you want to invest, to add, to expand, to fix things up.

Business is good. You're not worried about paying it back.

Then you have an unexpected slow down, (and they are always unexpected) and before you can adjust, you use up another 10k of that credit.

Suddenly, you have used up 25 out of 30k of credit.

You survive another few years without using up the credit, and are finally rewarded with a nice few years of upsurge.

But you are only able to pay off, say, 5k of the 25k you owe. Why?

Because you are starting in a hole. You've probably let your infrastructure go south, your fixtures get worn, you've probably let your inventory get stale.

Making money in business is hard even when conditions are good; and the better business is, the more likely that you'll have increased expenses, like rent, increased competition and so on.

So you've got to catch up.

It's as if you start climbing Mt. Everest, not from the foothills but from sea level. You have to walk all the way to the mountain before you can even begin to climb it.

Businesses almost always accumulate mistakes.

New businesses have the luxury of starting out fresh.

So the same economic conditions that look good to a new business, can be bad news to an old business

12 comments:

Jeff said...

Hmmm .... so can we conclude that no (honest) small business-owner can ever get rich? That even in the best of times, it's the worst of times?

Duncan McGeary said...

Shhhh......you're not supposed to know that.

I'll probably lose all credibility but....I've sometimes wondered. If you winnow it down to small business, selling product? Not a service business or a restuarant? In a small town?

Look around, and tell me who's gotten rich.

Still, I'd like to believe that a better idea would get you there...

It has to be. The big guys came out of the little guys, after all.

Then again, I've heard it said that behind every great fortune is a crime.

I'm probably just a little discouraged, right now, that I didn't make the big profits I thought I would this year. Muddled through, as usual.

Duncan McGeary said...

You've got me thinking. We need:

A product that sells itself. A product with high demand, that doesn't require specialized knowledge and or presentation.

A product that is easy for you to get, and hard for everyone else. Preferably a monopoly.

A high priced product with a huge markup.

A product where the customer will track you down.

A product with no competition, that Walmart and Target doesn't carry.

A location that is easy to find and see, but with low rent.

Low overhead, no employees, no expensive equipment or fixtures.

Modest business hours -- banker's hours.

No risk.

Don't have to pay until you've sold the product.

High demand, high supply, but no competition.

A product that has legs.

And so on.

If you have all those things, it's easy to get rich.

Duncan McGeary said...

A third attempt to answer you, Jeff.

The final answer is:

Yes, a small business owner could get rich. But it would take a rare combination of experience, luck and skill.

RDC said...

I know several small business owners who have made out very very well. A few of their businesses:

1. Coin operated laundries
2. Dry cleaners
3. Oil change business
4. Tires

Duncan McGeary said...

Not exactly 'sexy' businesses.

I think in retail it's just very hard to make an 'extra' profit because the minute you find a product in demand with a good markup, you'll get competition, and usually the comp. will undercut you.

Find a great location, the rent will go up. Find a great employee, give him a raise or lose him. And so on.

Their is a razor thin margin between success and failure.

Duncan McGeary said...

I feel as though, over the years, I've had the luck without the experience, and the experience without the luck.

I'm still waiting.

BENDBUST said...

Their is a razor thin margin between success and failure.

...

Success is survival over 90% of new business, doesn't even survive its first 1-3 years. Over 90% of people who quit a good job to be on their 'own' are back working for someone else in a few years, if they can get re-hired.

Now for the hard-ball shit. If it was easy to get rich, everyone would be rich. It ain't and never was. Over the long haul you can make money in Real Estate. These days you can make money in 'investment banking', if you went to the right school, and live in NYC, and have connections you can make REAL MONEY.

Most 'small ma&pa' businessmen have only ever done minimum-wage at best, if they survive. This is NOT new. Go to "Economics", by Paul Samuelson, written after WWII, and he tells the story, and it ain't changed one iota.

So why do they even bother? I think its the dream. What's most fascinating about Samuelsons book, is he has a chapter on all professions, and then as now doctors, lawyers, cpas, dentists, ... make the best money for the longest working years.

Regarding the GUY that makes BIG BUCKS QUICK, its all about being at the right place at the right time.

I have always said that 'success' is survival, and that make Duncan a success, but nobody can make real money playing the ma&pa small-biz game.

The key to make BIG-MONEY, is youth, and using your brain, look around see who is making the big money and do what they do. This is why BEND is 'OUT', in Bend we come here to spend our money, everyone loses money in Bend. Even the merchants of Bend only have 10 weeks a year to squeeze blood out of the tourists.

First step in making BIG money would to be in a fast growing biz and area, and I don't mean speculative real estate bubble economy ( bend 2004 ).

These days I would say China or India, if you setup right you can make BIG money. Remember that over 90% of Chinese & Indians don't have 1% of what US citizens have, thus for the next few generations, the purchasing power will be there.

I really think the USA is going to become a static economy like much of France or Italy where there is one bakery, and it has always been in the family for ever town. Nobody gets rich, but everyone gets by.

Anybody that really wants to get rich in business, needs to be where the velocity of money turns daily, and people work 24 hours a day, and that be Shanghai, ....

Lastly, note money isn't everything with it brings misery of its own kind. A small biz, like the old super burrito, where family prepares the food, and over-head is low, can be a life-style, which is far better than being in a cubical or corporate frying pan. If you want money, go where everyone is making REAL MONEY, you'll get rich, but most may not recognize what you become.

Jeff said...

The problem with retail is that there are no real "barriers to entry" -- start up costs are fairly low . . . you either have to get really big (to get economies of scale and buying power like WalMart), or be able to tap into a niche market based on your unique product (Duncan's long-tail theory) or be in the right location (the only coin-operated laundry on the block). It sucks to be in the middle. . .

Duncan McGeary said...

I call it dancing on the edge of the cliff. If you dance vigorously, you'd prefer to have a bit of room between you and the edge of the cliff. But if you leave too much room, someone will squeeze between you and edge and take the prize.

RDC said...

The question was can you make money with small businesses, not can you make money with a small sexy business.

The key is not much different then the key to long term investing. Set up a business with as consistent a positive cash flow as possible that generates a reasonable return on capital and repeat.

I know one fellow that generates over 300k per year from coin operated laundries. Now he has several of them, many not in the nicer area of the town in which they are located but they are cash machines.

The key is location and market. If you get the demographics right (and the one common feature is that these folks have a formula that they follow and they get the demographics right) then off you go.

Again most of them are what I would call blue collar businesses. Businesses that people need if the economy is up or down (actually in many cases they do better in a down economy).

In some of the cases such as Car washes or self storage units, they are capital intensive, but really spin off cash.

Duncan McGeary said...

I think you're right that the trick is to get the formula right. I didn't realize, for instance, that the formula for what I wanted to do was missing a few factors.

Linda's store had the right formula right from the start, and it shows.

But we understood what to do because of all the years of mistakes.

Still, a blue collar, non-sexy, non university style skill with a service type model would be the way I'd advise anyone who wanted to make money in business.

plumber, electricians, etc. seem to have a constant supply of customers, can charge what they need to charge, can't be undercut by big business.

Or so it looks from the outside.