October 16

Getting Profitable

Lesson 2: Can My Business be Saved?

If you have been struggling to generate a profit from your coffee business and you’re running out of money and hope, then one of the most difficult questions you must ask yourself is: “can my business be saved?” Should you continue to struggle to achieve profitability, try to sell your business, or just cut your losses by shutting your doors? The answers to these questions should be influenced by the length of time you have been open, the remaining untapped potential of your market, the trend of your monthly loss trajectory, and the amount operating capital you still have available and are willing to risk.

First, understand that the vast majority of retail foodservice businesses (coffee being one) run in the “red” for the first 6 to 18 months before they ever generate a profit, and sadly, some will never become profitable. Hopefully you had a healthy amount of operating capital set aside when you opened to help offset these losses.

The trend at which your monthly losses have been decreasing is important. If you have been open for business for a year or more, then this trend becomes even more telling. For example, below are graphs showing the loss trajectory for two businesses. The first shows a business where losses have decreased significantly and consistently over its first 18 months. From this trend, one could assume that this business still has a good chance of achieving profitability. The second graph paints a much more pessimistic picture. The fact that the monthly loss trajectory has almost flattened out and the business is still far from breaking even after two years, indicates that profitability might be difficult, if not impossible to achieve.

graph-1 graph-2Fatal mistakes made prior to opening for business can potentially predestine an operation to fail. Picking an inferior location (one incapable of producing the needed daily transactions to produce a profit) is one of the most common. Likewise, a location that’s not highly visible to passing consumers, or that is difficult to access, can also lead to business failure. Agreeing to an outrageous lease, developing an inadequate concept, or starting off grossly undercapitalized are other reasons why businesses struggle or fail. I consider these types of mistakes to be fatal because they usually can’t be easily or affordably fixed. I only mention this because at some point, you must determine if your business is a “boat” with some small leaks, or a gaping hole that can’t be patched. However, even if you think you made one of these mistakes, you should at least try to “patch” your business as opposed to just letting it sink!

If you run a tight ship and you’ve done everything possible to cut expenses and build sales, but you find your business in a situation similar to the second graph, then continuing to operate may only be postponing the inevitable. Should you determine that your business can’t be saved, or you have no desire to continue, then selling your business will be far more advantageous than just shutting your doors.

While you probably won’t be able to recover all of your investment, at least you will be able to recover some of it. More importantly, if your lease is transferable, a buyer can release you from that ongoing liability. And, always remember, your business will be worth more to a potential buyer if it is still operating, even if it’s losing money. However, if you just shut your doors and move your equipment and furnishings to your garage, then your assets will only be worth pennies on the dollar… at best.

Unless you are at the point where you can’t buy product, meet payroll, or pay taxes, it’s premature to think about closing your business. You certainly shouldn’t make that decision until you’ve applied all the actions that will be suggested in the articles over the next several months in this series. Remember, the reason most folks don’t make a profit in this business is due to a lack of control over expenses, and/or an inability to grow sales. Sometimes these are problems that can be readily fixed with the right actions and a determined mindset.

Ed Arvidson is a 25-year veteran consultant to the Specialty Coffee industry, and President of E&C Consulting. Elements of this article are from his new book, “How to Get Profitable in the Coffee Business.” www.coffeebizhelp.com

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