Is the E-Commerce Sales Channel Right For Every Business?
Earlier today I spoke with a small business owner who wanted some advice on how to grow their business and find new customers. This mother-daughter owned company is facing what many are nowadays. Their wholesale business to brick and mortar stores has dried up.
On top of this, the mother in this duo would like to retire. She would like to close up shop but her daughter doesn’t want to because she feels they are right at the tipping point.
Let me explain some of their particular challenges.
Seven-years ago mom & daughter founded a vegan snack company. The motive behind starting the company was to provide healthy snack options for an ailing family member. They wanted to create a delicious vegan, gluten-free, and dairy-free snack chip.
Their sales have seen significant double-digit growth YOY but, they are still not able to give themselves a paycheck. To date, the business has been 100% self-funded by the mother.
In other words, this company is still what many people would call a Passion Project.
At this point, many people would look at this and throw in the towel.
These owners have made the most common mistake when starting a business. Lack of cash! They did not have enough cash in the bank to start the company in the first place.
Let me explain. We know there are only 3 ways to increase sales. 1) Cut Expenses 2) Increase Prices 3) Find More Customers
From the beginning, this company was not leveraging its buying power for the raw materials needed to make the snack food. They have been purchasing at much higher prices than if they had bought ingredients in bulk. This one step has eaten into their profit margin, decreased cash flow, and hindered their ability to grow.
The second problem they are facing is the capacity and lack of manpower. Their particular product takes many hours to complete. While they have turned their garage into a commercial kitchen it is still not big enough to accommodate large orders that some of their potential customers have wanted to place. Additionally, the mother would like to reduce the amount of time she is spending in the business.
The third pain point is finding more customers. The daughter is unsure of how to find customers that would be a good fit for them and allow them to operate under the current situation.
Right off the bat, it is obvious that this business needs an influx of cash if it wants to stay operational. But, they must plan what they will do with that money very carefully or they will be right back in the same situation.
So, here’s some good news. Their wholesale customers will begin reopening in the coming weeks which will help jump-start the cash flow. Also, they do sell from their own website and Amazon using FBA. Wholefoods have invited the business to apply to the Whole Foods Local Program. The downside this is at least 12-18 months away from being a reality.
The best news that I heard is where they are NOT looking for customers. This business has a few untapped customer bases, distributors, small grocery specialty stores, and food expos/trade shows.
The daughter tells me that she has had interest from all three of these potential customers. But, the thing holding them back is lack of cash.
This is what I recommended to her. First, go back and really look at your numbers. If you had the funds to purchase in bulk would what would your new profit margins be?
In order to be successful, your Gross Margin should be at least 50%. Your Net Margin should not be less than 20%. A 20% Net Margin allows you to break even not really grow.
A Growth Net Margin should be 30%. This allows you to reinvest in the business.
Second, I suggested that she create a new budget for the next 12 months based on the expected revenue she could gain if she proceeded with the new sales channels.
She needs to include the cost of goods (raw materials). This owner also needs to consider how she would scale her production to offset the demand and how to shorten the current lead time.
Third, I recommended she create a graduated sales plan. Prior to the Pandemic, their goal for 2020 was to double 2019 sales. I don’t think this is out of range but, they need to make significant changes to their purchasing. She needs to determine how much of a cash influx do they need to hit the sales goals.
Finally, the mother-daughter team needs to create a longevity plan. How can the mother exit the company? How can they replace the mother with a paying employee? How can they pay the daughter a salary? How can they afford to scale even more if the number of orders require it?
If they choose to move forward it is not an easy road. It will take a significant cash influx to sustain the business through the growth phase and then there is still no guarantee given the current economic climate.
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