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Every Friday, I post a small insight into running Curio City and/or Blue Hills Editorial Services. My most recent posts are directly below. You can also start with the first post, or use the subject labels to the right to home in on particular topics. Feel free to comment on anything that interests you.
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Saturday, September 02, 2006

Labor Day? Christmas Is Coming!

Summer is my favorite season. But in retail, summertime is dead. Established retailers with deep pockets can take seasonality in stride. It is a real challenge for a young, hand-to-mouth company like Kraken Enterprises. My paycheck is a percentage of net sales; when business falls off, so does my income.

August was the month of the empty wallet. Some weeks, I couldn’t even pay my own bar tab at Flanagan’s (even on $1 pizza night). Thus do I welcome Labor Day.

As I mentioned in The State of the City post, I could easily spend $5,000 on new products and reorders that are currently wishlisted. The largest single percentage of my sales goes to buying merchandise. This “open-to-buy” (OTB) mostly just replaces the stuff that sells. When business is good and sales are broad-based, there is enough cash flow to expand into new product lines before I need to reorder existing items. When business is slow – as in August – OTB just barely grows enough to replace the few items that are selling.

In fact, the OTB budget sometimes doesn’t even cover the product cost, especially if I use discounts and markdowns to drive sales. Consider Neverlate clocks. A back-to-school run on those forced me to spend $265 on replacements at a time when my OTB held only $54 and sales in general were poor. The introductory pricing that I negotiated on my initial order was not available for the reorder, so my already-marginal 43% markup on that product fell to only 37% (meaning that 63% of the revenue from Neverlate sales just pays for the clocks). My benchmark, based on my across-the-board markup, is 50%. I could stop carrying low-margin items…but I can’t walk away from anything that actually sells. I could raise the price of Neverlates, as a few other retailers have done…but my primary competitors, who get better pricing on their higher volume, would undersell me so much that I’d probably never move another Neverlate. I could increase the portion of sales that go into OTB…except that I’d have to cut something else, and there is definitely no wriggle room when my P&L plan optimistically forecasts profits of $12 in 2007 and $20 in 2008.

Having gradually recovered from that unexpected Neverlate reorder, my OTB today holds exactly $81.27. To bring in new Fall items, I have to borrow against anticipated sales (sending OTB into the red and risking a general cash flow crisis), or take on debt, or infuse cash from somewhere else.

Shall I run a balance on my credit card for the first time? If you’ve read my history, you know that I’m trying very hard to achieve breakeven without going into debt. Debt is a last resort. Bzzzt!

What about nicking operating cash to overspend my OTB? About 90% of all business failures are caused by cash-flow crises. I can’t risk a chronic cash shortage. Bzzzt!

That leaves Phase 2 startup money.

I do have a little money left in my development budget for website improvements. I still have ambitious design plans, and Sunshop 4 is right around the corner. But given my developer’s limited availability, I probably can’t spend my entire Phase 2 budget. So I can free up a few hundred bucks there.

I also have some advertising budget left, which I’m gradually pissing away on PPC advertising. Until I figure out search-engine optimization (which is just not going to happen on its own), PPC ads bring in 90% of my traffic. Not only can I not afford to pull the plug on those...I’ll need to boost my subsidy during the Christmas season. Phase 2 runs through April 2007, so I need to keep bleeding ad money for another 7 months. I can divert at most a few hundred dollars from that budget.

A few hundred here, a few hundred there: It still doesn’t add up to real money. The only real solution is a recovery in sales. But Christmas is coming, oh yes it is: the 900-pound gorilla of retailing. By the time sales recover and cash flows comfortably again, it will be too late. My initial Christmas orders have to go in during September and October.

* * * * *

Incidentally, I have in mind the following topics for future posts. If there’s anything you’d like to read about, leave me a comment:
  • Startup Phases
  • “We” versus “I”
  • Good Debt, Bad Debt
  • Long-term Prospects

Absent reader input, I’ll eventually write all of those posts in due time.

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