Always start on a shoestring budget

One of the things about starting a new business is that you should always start on a shoestring budget. It’s easy to get carried away, especially if you have a lot of savings. You’re not going to start a business thinking it will fail, therefore you will always be over-optimistic and that can lead to poor discipline in cost-control. And a business is all about cost control – every business, if it is going to be profitable, has to control costs. So it’s best to start small and on a shoe-string. Test the waters and make sure you have a profitable concept before throwing everything in.

When starting Tonic, we were so enthusiastic about it that, as often happens, we over-forcasted sales, underestimated costs and were slow in adapting to the reality of the market. I realised this most fully when I met Mandy, who has a juice bar in a shopping centre. Being an ex-chef, she knows all about managing costs in a food and drink environment and admits that it is VERY easy to get wrong. At the same time I have done lots of other research and found exactly that – our product costs are not properly calculated, and we are bleeding money everywhere in this business – high raw product costs, wastage (this is huge!) and more. For a £3 our gross margin is £1.50 and once you deduct other costs and VAT, there is very little contribution to fixed costs. And the fixed costs are about £70k per year!! It;s ok for Starbucks because their baseline product has a 90% margin so they can absorb ore cost. Our gross margins are just too low and our overall costs are just too high. If we really want this to work we have to reassess al costs, every single one. So I started breaking down the costs of everything, and I mean everything. Every ingredient in every drink. All overhaeads and more. At the same time I started trying to renegotiate the rent and try to get a rent-free period. At the end of the day, retail is generally struggling due to the credit crunch. In this particular location all the shops in the mall are struggling. Everyone is trying to renegotiate the rent. I don’t know if we’ll get it, but we’ve got to try. At this rent level and in this economic climate and at his location, it’s just not going to work and no other business will survive so the landlord is going to have to cut us some slack otherwise we have no choice but to cut our losses.