Wednesday, January 2, 2008

Million Dollar Dash

A niche branded apparel maker must walk a fine line when expanding distibution, especially when your focus will be on boutiques, specialty stores and high end department stores. There really can be too much of a good thing, but there can also be too little of a good thing.

If there is too much of your label in a concentrate region, the "specialty" merchandise label will no longer apply and your product will become a commodity. However, if you don't sell enough product you won't be able to stay in business. The key is to expand geographically with your label so you can maintain the "specialty" appeal of your product and get to an annual sales volume where you can make a profit.

So what type of sales volume do you need? My answer to this question is what I call the "million dollar dash." Once you've made a decision to build a label that will be more than a hobby, you need to get to a million dollars in sales volume within three years. If you don't want to run the race that's fine because you can focus on having a profitable hobby and not quit your day job. If however, you are going to make a living from your business you'll need to run the million dollar dash.

Why three years? Burn-out. After three years you'll get so sick of the endless hours, the steady diet of sleepless nights and the fact you aren't making any money that you'll wake up one morning and decide it ain't worth it! The solution to the endless hours and incredible stress will be to a hire a small number of people and this leads to the money part of the race.

Why one million dollars? Assume for the moment you can price your product with a 55% gross margin (I'll talk more about this in a future post) and this will allow retailers to buy it, mark it up and sell it. With close to 15 years in the business, I can say if you price at a 55% gross margin, when you add it all up at the end of the year and file your taxes you'll be lucky to end up with a 40% gross margin.

The loss 15% is what I call "ideal direct cost dilution." You need 400 yards of fabric at $7 per yard and the mill minimum is 500 yards, your true cost per yard is $8.75. Your button supplier is late what a surprise. Instead of a $50 UPS bill, you have it sent FedEx at $300. You ship a catalog or department store and the box weight exceeds 30 pounds, guess what that just cost $50 per box. After all this you're ready to ship a week past the cancel date, that's going to cost you with some of your customers. The list goes on and on, so don't be surprised when you loose 15% in gross margin.

You're going to need a full time team of 5 people to manage design, sampling, production planning, purchasing, quality, trade shows, customer service, warehouse and the finances. In addition, you'll need some temp help for the warehouse twice each year to get the product shipped by the cancel date. After you get done matching FICA, paying wages, unemployment and workers comp insurance each employee is going to cost about $40,000. The temp help will run about $10,000 each year. This totals $210,000.

Guess what independent sales people work for commissions and if you want them to work hard you should pay at least 10%; that's $100,000 of the million in sales. The two New York trade shows you'll need to exhibit, will cost about $25,000 after you pay for travel, event fees, decorations and the ten dollar bottles of water. Add in hazard & liability insurance, rent, office supplies, postage, accounting fees, etc and this will easily run another $65,000.

Why one million dollars? Just do the math.

$1,000,000 Gross revenues
-600,000 Cost of goods sold

=400,000 Gross profit

-210,000 Labor (your one of the employees)
-100,000 Sales commissions
-25,000 Trade shows/advertisement
-65,000 Other necessary expenses

$0 Net Profit

At least you made $40,000 as an employee and you now know your business' break even point!

In future posts I'll explain ways to lower your cost of goods sold and other indirect costs and also to get back some of the ideal direct cost dilution. This morning I read a great post by Jeff Cornwall about Bootstrapping your Business for Income and Wealth. Bootstrapping is extremely important for the long term success and profitability of your business.

1 comment:

Anonymous said...

is this for real?