To give you an example of the capacity issues: a friend of mine - let's call her Lucy - wants to set up a cake shop. It doesn't have to be cakes, it could be anything that requires your time and expertise to make. And she is rather good at making cakes, that isn't in question at all as my tummy has enjoyed them! This is where it gets more tricky for her - capacity.
For any small business starter you need to know your numbers. Here's a basic breakdown:
- How much do you need to bring into your household each month to survive (notice I said survive, you are a startup so work on worst case scenarios as anything else is a bonus in year one)
- How many hours can you realistically work at your business - you need to sleep, take small people to school, visit your Mum and see your friends from time to time. If it helps keep a little calendar check of your schedule for a week and then work out the hours you do have or could make available.
- How long does it take you to make each item - if you batch make something then work out a time for 10 or 20 perhaps but as long as you know for example 20 cakes = 2 hours from start to completion.
- Now you need to work out how much profit you have after selling your work - ignore the time for the minute, just deduct materials cost from selling price. Remember to include packaging!
You now have your four basic figures to work out if you can survive:
- Use the time per item and see how many you can make in your available time, eg if 20 cakes takes you 2 hours and you have 6 hours in a day then you can produce 120 cakes
- Now multiply that number by your profit per item - again, if your cakes have a profit of £1 per cake you have £120 profit per baking day
- Does that £120 per day multiplied over your working week or month cover what you need to survive?
- If yes, fantastic; if no what can we change?
If you end up with a situation where you realise you cannot produce enough to cover your required income then look to diversify. In the case of the cake shop, can you sell supplies for cake makers? Could you get a friend to do some classes in exchange for something? Rather than you launch your own cake shop can you supply local cafes or shops to start with and build up your customer base?
Capacity is the hidden curse of the small trader - we are required to be all things at the beginning, maker, seller, advertiser, accountant, shopkeeper and the list is endless! This is where it is useful to look to what is sensible, where is your time best spent? What use of your time is going to best move your idea forward?
Having said all that, there is also an element of risk attached to any start up and you have to decide where your personal risk limit is. Some are happy to take on a shop lease and work out as they go along, some are more cautious and need to have a full spreadsheet in advance of looking to open. Neither way is right or wrong, it is an incredibly personal decision. Whichever route you choose, just make sure you stay on the right side of the balance sheet and have fun discovering your potential! Also, don't forget there is loads of help out there to bounce ideas and get going. We love being part of Enterprise Rockers as there are so many supportive and knowledgeble folk in that group, so make sure you take full advantage of the help out there to make your business work for you.
First published by Enterprise Rockers at: http://sme-blog.com/guest-blog/capacity-the-hidden-curse-of-the-small-business-and-how-to-resolve-it