Entrepreneurs are bold- they are brave enough to start businesses in uncertain times, they throw convention out the window, quit perfectly good “jobs” and define themselves by the way they are changing the world through their products and services. Sometimes, though, entrepreneurs bite off more than they can chew.
One of the major reasons that businesses seek funding is in order to expand into new markets. The question they need to be asking is: Why now?
Well, I need to make more money…
When net profits are not ideal, there are many things to look at. Sometimes, the reason that entrepreneurs feel like they are not making enough money has more to do with margins and overhead than gross revenue. Pretend for a minute you sell mall food-court cookies – at a buck a cookie, you are taking in a lot of cash from customers every day (that’s your gross revenue). Your cookies only cost you about $0.20 each to make, so your mark-up is pretty good (in fact your gross margin is 80%). However, you are working a 7 day week on your cookie chain gang and making very little money to take home. Your family is getting sick of you and your mall cookies. Is expansion to a second location the answer? Heck no- fixing the business you already have is the answer. In the case above, it is likely the location that is killing our fearless entrepreneur. Malls have notoriously high rents, but if you are only making $0.80 on each transaction, you have to do a whole lot of transactions to cover your overhead costs.
Rather than sinking a lot more (borrowed) money into another location, our cookie warrior can look into coffee sales, or perhaps gift baskets, or even gift cards as ways of getting people to drop a little more cash per transaction. Perhaps the location that they are in needs some reconsideration- if the foot traffic at this particular mall is not high enough then maybe it is time to see about getting out of that lease.
Have you expanded your business recently? What was the primary driver in your decision making process?