Starting a business

[adrianh]

Sounds like you've been there and got the tee shirt but you'll need it in 4XL to get all that post on it.

I think the thing with the math is you've got to truely understand your expenses and truely understand what constitutes salary and what constitutes profit. Your point about kidding yourself is very valid as well, there's many small business owners that are constantly in a state of denial and don't see the elephant in the room because they simply don't want to.

The math is hard because we look at it from the wrong perspective. We look at it purely in terms of "profit". Of course profit isn't cash in hand and cash in hand keeps you alive. It took me a long time to realize that simply churning money over has no value. Turning over R1,000,000 and spending R1,000,001 to make the money isn't particularly useful.

I've truly learned so many things and still learn every day:

1. Banks are parasites. Although it is nice to use cards and EFT you are better off running as much cash as you can. If the customer pays you R3K in cash and you then pay your supplier or Pick & Pay using that cash you save on all the associated fees. I am not saying trade under the counter, I am saying that you should try to avoid the banks as far as possible.
2. The one thing that I've had to come to grips with is calculating actual manufacturing cost. I can now project practically any job in advance with a 10% accuracy.
3. Another thing that ties in directly with point 2 is "opportunity cost". Ok, let's say you can earn R150 per hour working art your day job or R300 doing something for customer A or R 10 for customer B you should be brutally honest and do the work that ads the most value, not only financially but in the long term. I was always told that if you trade and you are not making any tangible money you are better off spending the entire day watching videos. The reason for this is that you burn yourself out accomplishing nothing.
4. There is another very important fact that you need to keep in mind about "opportunity cost" I will give you an example from my business. If I do a very complicated job once off for a customer and it takes me a long time to do I run the risk of making money in the short term and adding no value in the long term. When I evaluate the work that I am getting into I try to make sure that the time spent can be re-used in some way in the future. If I spend one hour developing a product that I can sell 500 times then that hour is better spent doing the development work (provided of course that you have enough cash not to have to bring cash in for that hour. The approach that I took at the outset was very problematic because I spent all my time developing products and no time selling them. That is not useful either because you die of hunger whilst creating your masterpiece.
5. Bread and butter money is always something to keep in mind. Develop a couple of easy to manufacture things that you can spit out and sell easily. That way you create a small ongoing income stream while you work on the bigger things.
6. Be very careful of big companies. I got stung many times by taking on big orders at low margins. The effect that it has on the business is that you work your butt off, you don't make real money and the bugger pay you on 30 day terms etc.
7. I don't give terms at all anymore, pay me COD or go away. A customer of ours gave a craft shop R7K of stuff on consignment. The shop closed down and she couldn't get anything back.
8. Talking about T-shirts. We made some custom T-shirts only to get the spelling wrong, the sizes wrong or even the colours wrong. I no longer do custom work unless I am very very sure that the customer isn't going to give me a hard time. You are far better off steering clear of stuff where customers can change their minds.

I can rattle on an on but the bottom line is simply that you have to roll with the punches and that you shouldn't take misfortune to heart. It is a long hard road but it is very rewarding even if you don't make a fortune. I love being able to say that I am in control of my destiny, even if that control is rather hap-hazard most of the time.

[adrianh]

When I factor my costing, I take my salary as part of the expense to manufacture. I then place the mark up on the final amount. At some point in the future, you want to get out of being the worker, and employ someone to take over, if you have not taken this into consideration from the onset, then you will never be able too.

What I have done is, that I have taken all the expenses to run the business every month, including wages and salaries, insurance, telephone, staff refreshments, etc, just like a trial balance with only expenses excluding the cost of stock and materials to manufacture, but include consumables, and averaged this cost across the number of hours you expect to work in one month, in my case I have taken my business hours, 160 hours per month. Divide the total run cost by the number of hours, and it gives you a very good indication what you hourly running cost is. You will be surprised how high it actually is. Now once you can work out how long a job takes, you know what it costs to manufacture, now add in the raw materials cost and you have a pretty good idea on the actual cost.

I need to go through this exercise.....I think that not doing this exercise is the biggest thing that is messing my business up at the moment. <Printscreen...Shreadsheet to do today>

[SamanthaLeigh]

Hi there,
I'm finding this thread rather interesting as I have also just started my own little business.
I was really hoping that someone would spend more time answering ians question about Tax. He may not need a VAT number yet as he isn't earning enough yet but what happens at the end of the Tax year?
When I did my Tax this year I saw there was a question of any 'extra earnings', which I would assume you would select yes and then put in the amount. But do you put in just the profits your earned? Or all the money that came into your business? Or do you pay Tax on the money that comes in every month?
These might be silly questions but I have only ever freelanced in my life and so am now sure how Tax works in business terms.

[Justloadit]

What I find interesting about this thread, is that it is really materializing my findings that I have delved into over the last 3 or 4 months, I have been mulling over what I have been doing wrong, in other words, why is there not a fat bank account with my name on it. The realization has come is that my mark up, even after I have factored all the costs is toooo low. I was working on a 30 to 35% mark up on my so called calculated cost on production runs, but I have pushed it up to between 40 and 50%, and am noticing the bank balance improving every month. I have subsequently worked out that not all jobs go according to plan, and when you have allocated the hours to the job, it invariably takes longer because of external factors, such as late deliveries from suppliers, no stock at regular suppliers so you have to buy out from other suppliers at a higher cost. Another point to consider very carefully is selecting the right customer, I now avoid the customer who always complains that I am too expensive and wants everything yesterday, my words usually are "well you are entitled to find someone else with my blessing". Fortunately I have had other business to allow me to say this, there was a time last year where I had to take on any crappy work, which cost me more in time than in income.

I have also been limiting my time spent in meetings with prospective clients. If I feel that with in the first 5 minutes that there is going to be no business, then I tend to end the meeting cordially. I also tend to get all my correspondence by mail, as opposed to telephonic calls. Telephonic calls take up a huge amount of time and are disruptive. Emails allows me to answer when I am free, and also gets my full attention. I know this is not what customers want to hear, but this is the reality, when you are a small business, and you are the captain of the ship, who doubles up as the first mate and engineer. When the ship is heading towards the bank because of a stuck rudder, believe me that telephone call will make sure you strike the bank so to speak.

[adrianh]

I ran a quick spread sheet looking at the business top down as Justloadit suggested. It is very clear that I am not earning enough per hour. Another thing that I did was to speak to the staff about how long it takes to manufacture particular products. It is interesting to see that some products make R300 per hour and some R70 per hour. We have to deliver some of the high value stuff and some of the low value stuff but I can now plan the number of items that need to be delivered extremely well. This side of the operation can now be planned accordingly. The thing now is to see how much money one can generate from the lasers. Both lasers are terribly under utilized and if we were to get them working earning ever R50 an hour they would generate a good income.

Lots and lots to think about.....

With rega5rds to tax: I think that if you are earning smallish amounts of money and you are not VAT registered and your clients are not paying money directly into your bank account you simply keep your mouth shut. Once you start dealing with people who are unwilling to work with cash and who want invoices etc then you have to do the legal thing...which I am sure somebody else would be able to tell you.

[adrianh]

Adrian I like the way you think. I agree with all your points.

Just like no. 21 to your list.

When you find something wrong on a site or an item a customers brings you especially if it was built or installed by some else, don't make a fuss about, no matter how f$&)( up it is rather just keep quite and offer a solution with a quote. Chances are you will get to fix it, but if you go on about what kak the other person did you might find yourself without work, as you mentioned word gets around.

I agree. I make a point of not shooting the opposition down. I always just say that we serve different markets and that those markets sometimes overlap. I had a interesting one a couple of days ago. I manufacture a kit that will basically change the body of a particular model. The kit is fine but the underlying model is total rubbish and I've had endless trouble with them. There is a product available on the market that is extremely nicely built and really very good quality and is exactly the same product as we build the kit for. I had a customer that really wanted our kit. Given the amount of $h1t that I've had from customers due to the chassis I said to the guy that he would better off buying the other product because it is really good and that my product can't match the quality of the other. We went back and forth about the reason I said that for a bit and he then decided to buy the other one. He came back after having placed the order for the other one and was very taken by the fact that I advised him to rather spend his money elsewhere. I said that I would rather have him buy a good quality product than my product per se.

Maybe this is why I am not filthy rich, I am simply unable to knowingly sell crap to people, even if the crap is something that I make. The product has been removed fro the catalogue so hopefully I won't have to go through the same exercise again.

[Citizen X]

Maybe this is why I am not filthy rich, I am simply unable to knowingly sell crap to people, even if the crap is something that I make. The product has been removed fro the catalogue so hopefully I won't have to go through the same exercise again.

Adrian, you have integrity! Integrity and a good reputation is priceless....

[HR Solutions]

Adrian I lagree with you - We will also not lower our standards for anything ! We have a certain standard and stick to that.

[ians]

Just want to make another point and keep it short because i am not focusing on contracting (something i have done all my life) in this thread more my hobbies/new ventures which are manufacturing.

Talking about big companies or main contractors, you need to be very careful when dealing with them if you are small or a sub contractor. I have heard the phrase " we will see you right on the next project" or "We didnt make any money on this one, but next time" 10 years done the line, their wives are all driving the latest SUV, living in multi million rand houses, kids all in private schools and all us sub contractor suckers are still battling along with the same old scrap bakkie ,being promised the world. You need to make a price and stick to it, when the big company start offering to cover your live out allowance by offering you a place to stay and food etc or transportation to and from site and then the last but biggest chunk, they offer to supply the materials and consumables, you might as well pack up and work for the company because all they are doing is shafting you out of pension, medical aid, end of year bounses, leave pay etc etc.

The lesson to be learnt is if you are self employed, you need to make sure you charge your hourly rate and all the other things that come with it, otherwise you need to increase your rate so that it covers your overheads.

[ians]

Back to business...

Taxes we will eventually get to that, personally i would say get someone in the know to advise you. It may cost a few bob but int he long run, much like using a shopfitter to do all your electrics chances are you gona end coming short.

What are your thoughts about using a credit card to operate the small business?

The fees are minimal - a yearly fee. I never draw cash from the credit card only use it to pay suppliers by card (cost nothing) and get customer to pay directly into the credit card. This is something i am going to inquire about on Saturday.

I have done this with my contracting business, closed all the account and pay by credit card for purchases, this way i make sure the price is right at the time of purchase and not the end of the contract when i do the job card. I lost a lot of money on a fair size project last year because of this. Prices quoted where not invoiced and when i went back to fight with the supplier there were a hundred and one excuses.

[Houses4Rent]

Adrian, you have integrity! Integrity and a good reputation is priceless....

I also managed to built up a good reputation which is the best (and free) marketing ever. If I feel that a prospect's needs can be satisfied by others for less (normal agents) I tell him so rather than pay more for our specialised services. So some then go elsewhere. Fine with me, but its fairly common that they come back to me after they have burnt their fingers elsewhere and then stay with me.

[adrianh]

The lyrics of a song by Toby Keith (strangely enough) has also become a business motto of mine "There is no right way to do the wrong thing" I catch myself often perfecting something that is essentially a waste of time. The most difficult thing for me is to know which is the right thing to spend my time on. The problem I think with being hyper creative is that one tries to design and perfect everything rather than creating and perfecting the correct things for the business and expending the rest of the creativity on other pursuits.

With regard to what JustLoadIt said about working out your required hourly income. I did the exercise and went through the products and I find it striking how easily we could attain those figures if were to set out a very simple plan and stuck to it. I have been told this many times but it never sunk in. My stupid brain needs to work through the process itself to reach the required (obvious) conclusion (that I was told over and over again) This is exactly what I mean about trying to find the right way to do the wrong thing, I have, and keep on designing many many products that don't get sold because there is no plan the cover the basic costs.

So, ians, just like you said, it takes somebody to make a comment that stirs a thought process in your mind to change the way one sees things.

[Justloadit]

Knowing the actual hourly running cost of your company really makes you look at things differently, a meeting here, a phone call there, and all of a sudden you start thinking that this is now being unproductive, whilst I was on the phone with this customer who will never buy from me, just cost me X Rands. You start evaluating every action, to see if what you are about to do is going to cover that cost. Once you get this right, you will see basic improvements on your profit line, off course you must make sure about the collection of your money.

It also fine tunes the way you do business, it makes you sell more aggressively too, and many times takes out the emotional urge to give a discount because the customer asked.

[Houses4Rent]

Yes and no. Whilst I agree one has to watch to stay productive and efficient one can often never predict that a certain action will yield or not yield. E.g. a call to someone who is perceived to never to buy anything might have a friend who might buy a lot. If it would not be for this informative phone call the friend might never have found out about your products. And then same person who never bought might buy one day too when his own circumstances changed.

[Justloadit]

Yes and no. Whilst I agree one has to watch to stay productive and efficient one can often never predict that a certain action will yield or not yield. E.g. a call to someone who is perceived to never to buy anything might have a friend who might buy a lot. If it would not be for this informative phone call the friend might never have found out about your products. And then same person who never bought might buy one day too when his own circumstances changed.

You are now referring to marketing. Completely different to manufacturing work. Many times the client wants to talk to the foreman, and not the sales person.

Marketing is another department, which you allocate a budget. This then also apples how you go about marketing.
Sales is another division, and is easy to measure, sales amount versus cost of selling.