Last week, I created a fictional coffee shop owner, who needs to reach a million dollars in sales to make $50,000. Some people thought I was harsh. “Depressing,” wrote one commenter.
My intent was to illustrate thin margins, not to scare people away. An educated community might better appreciate the challenges facing this important segment of our local economy. Customers ask for discounts, donations, jobs for their teenagers. Government increases fees. All justified by the notion that owners “make all that money.” Indeed, there is money to be had – just not as much as you might think.
When you walk into a business, it is easy to see revenue, not expense. Investment must mean wealth, right? More likely it means the owner’s savings is tied up. Yes, the owner gets to be her own boss, but she also is responsible for her employees. She gets to pay herself, but only when there is money left.
That said, small business ownership can be a rewarding career. Owners enjoy independence, creativity, the chance provide a unique product or service or even to make the community a better place. Successful entrepreneurs slave over their numbers and work hard to earn a living.
In my coffee shop example, I assumed a 5% profit margin. Profit is the money left after all expenses are paid. In addition to product cost and rent, expenses include the salaries of the baristas and the manager and the money to pay for marketing, social media and financial management.
That money is available to the owner who chooses to do the work himself rather than pay someone else. The owner might capture three different income streams: money from working production, money from management and money from performing typical overhead tasks. When everything goes well, there may also be profit that comes from owning the business. When things aren’t going well, the owner absorbs the loss in his own paycheck, allowing the business to survive and hopefully do better tomorrow.
Small business is challenging but not impossible. Next week we’ll talk through strategies to increase the odds of success and profitability.