This next Wednesday’s coaching class is “What Does Your Business Really Need?”
In the 35+ years that I’ve been a CPA to some of the nation’s wealthiest, both famous, not famous and even infamous, I’ve seen a lot of things. Some good. Some bad. And some make great stories, like this one.
A new start-up brewery began in Reno, in the days before microbrews were around every corner. They had a great name. They purportedly had a good product. (At least, so I’ve heard. I don’t drink beer.)
They needed capital to get going and so they raised money from family and then did an initial offering.
The plan was to bottle the local beer and sell in stores. They may eventually have a pub, but that was down the road. Remember this was in the days before the common brewpubs we see in almost every town and city now.
The endeavor seemed to be a success. Their beer was in a lot of the stores, but they needed more money and so they started a second round of investing. A client of mine invested before I had a chance to see any of the paperwork for the investment.
This time, my client brought me the paperwork. Did this look legit?
It didn’t take long to see where the problem was. It’s tough to get products into stores and usually you need to pay for shelf space. They also wanted the local distributor to be incentivized to sell their beer, so they paid a good commission for product to get it placed prominently.
Because the shelf placement was good and the product was good, the beer sold.
But the brewery still needed money. Why?
The answer was simple. The advertising and marketing costs were higher than the sales, even before the cost of goods was subtracted. In other words, their costs were higher, much higher, than their income and that meant they needed cash every day just to stay afloat.
That isn’t necessarily a bad sign, though, in the case of a start-up in this industry. You had to gain a foothold and get your product in front of the public. That usually requires higher commissions and payments for shelf space.
That’s the strategy they used. There is one more step, though. The higher commissions should drop off as sales continue. This is a strategy to get IN the door, not to stay in the door. They decided to go one better and signed contracts guaranteeing the same high payments for shelf space and commissions forever.
So, let me state this again. If they sold $100 worth of beer, it cost them $120 total to make and to place on the shelf. For every $100 of beer, they had to pay $20 forever. And that’s before you take into account all the other expenses like rent, office, licensing, legal and the like.
Every $100 in sales cost them $120 plus.
My question to them was, “What is the plan to get out of this hole?”
I’ll never forget the answer. “We’ll make it up in volume.”
My clients didn’t re-invest. The company eventually folded. The original investors lost their investments.
The obvious morale of the story is that you need to be able to read not just your financial statements, but those of other businesses you may want to invest in. The numbers always tell the story.
The other lesson here is from the business owner’s themselves. Bigger isn’t always better. Getting bigger could mean you turn a little loss into a huge loss. If your fundamental principles aren’t sound, you have to start with that. Tighten up your basics. Don’t make your business bigger until it’s better.
If you’d like to learn more about your business and finding out the 7 step process we use to help business owners identify what they REALLY need, then join us for the Wednesday, July 19th coaching class. You can join at: https://www.ustaxaid.com/coaching-program/
If you’re reading this blog after the coaching session has already passed, don’t worry! We also record the session and you can listen later once you’re enrolled in the coaching program.
The coaching sessions stay live for 3 months on the Coaching page. After that, they are removed from the coaching page and offered for sale as Home Study Courses ranging in price from $99 – $149.