They were experienced operators with a successful business already up and running.
They decided to take the brave step to open another premises in a different location that they believed was currently under-served with a new concept. After all this is what you do to drive on and make progress?
The budgets were carefully worked out including renovating the premises, purchasing and installing the equipment, furnishing and decorating, branding and signage, professional fees and then some allowance was made for working capital and other opening costs.
Their budget also included a marketing fund – there is no point opening a new business unless you tell your target audience about it!
When all the budgets are done you look at your funding and cash flow requirements, some leasing, loans and an overdraft to make all of this possible and then you try to carefully manage the ‘opening project’ so that you come in on target.
For as long as I have been in business including my time as an accountant and in management there is a ‘rule of thumb’ that nearly always applies: “Everything takes longer than you expect, everything costs more and there is always the ‘unexpected’ that you also have to cope with“.
As sure as night follows day there was a problem with the fire officer that resulted in extra work that was necessary for the building – this delayed the opening and resulted in extra unexpected costs. As a result there was a serious unexpected ‘hit’ on cashflow for this essential expenditure, which could not be avoided.
As a result the marketing budget was wiped out and this new business suddenly had to rely on ‘word of mouth‘ and social media to get the word out there.
Unfortunately the momentum was not enough and the volume of business coming through the door from the date of the opening was insufficient to cover basic running costs and within months the new venture had to be shut as it was not sustainable.
The reality of the situation was that the marketing fund was even more essential than the demands that the fire officer made on the project. One was essential to get the doors open and the other was essential to keep the doors open. As a result all investment, dreams, sweat and tears were lost and the existing business will take some time to mop up the resulting debts and the recovery.
The guys were put in a total predicament and were forced to do what they had to do and this ultimately was the act that effectively closed the business and put their existing business at serious risk.
Did they have any options?
They took a view and a huge risk that they could sacrifice the most essential overhead of all and this was their ultimate downfall (while totally understandable).
Maybe they could have done a few things different ..
They could have:
- Allowed for a contingency fund for delays/unexpected cost in the original budgets (you always need a buffer) – don’t go ahead until you have that
- Explored other ways of cutting back and leaving their marketing fund somewhat intact
- Looked for extra funds before proceeding any further with the project (would a bank manager have appreciated and understood their late request for extra funds? ultimately it might protect his own investment) – a strong open and honest relationship is a must for this to happen
- Negotiated credit with suppliers – again a strong, open and honest relationship is a must (would suppliers understand?)
We have seen this cruel scenario being repeated time and time again with clients with the same awful result. Some manage to survive the setback and many unfortunately do not.
Once open you must have a fund to promote your business because without awareness and customers everything else is at risk.
Keep dreaming, keep advancing, keep expanding but most importantly keep succeeding!