How Much Do I Need?
This article is one of the most math-intensive I’m going to write for this column. It’s not that the math is complicated; there’s just a fair bit of it to do. Fortunately, I’ve provided a couple of aids you’ll be able to download.
Also, please understand that I’m making certain assumptions about your business model. If you want to argue why my 60% cost of goods figure doesn’t seem to jibe with distributors offering you a 47% discount, or other details of the math, I’ll be happy to discuss it in the forum.
The amount of money you need is composed of two elements: your opening expenses, which you’ll spend before you open, and your capital reserve.
This figure is the simple sum of a long list of items. Here (DOC File) is a sample checklist for your planning. Note that your specific business plan might not call for all of these items. In fact, no store will use all of them–it includes line items for both rent and mortgage, for example.
Administrative & Operating Expenses
Sample costs include
- Accountant fees
- Attorney fees
- Utility deposits
- Rent deposit
- Bank fees & costs
How do you get these figures? By calling people who offer these products or services and asking how much they cost. For others, you might want to ask other businesses in your neighborhood how much they spend (trying to get a projected bill out of your electric company will probably drive you nuts, but they might be willing to give you a billing history of the suite you’re leasing). You’ll make dozens or hundreds of phone calls before you even open. You’ll want to keep extensive notes for your comparisons.
Sample Store: Sample store incorporates personally, saving attorney fees but still paying state fees. Sample store has no bargaining position with deposits and so pays the full $4,800 in rents and utility deposits. Total for this category: $5,500.
FFE: Furniture, Fixtures & Equipment
Sample costs include
- Wall fixtures (pegboard or slatwall or a combination)
- Computers (include software)
- Point-of-sale system (it’s software, but it’s important enough for its own listing)
- Receipt printer
- Bulletin board
- Misc. office supplies
- Shrink-wrap machine
- Cleaning supplies
Sample Store: Sample store has been buying fixtures for a year from liquidation sales and is willing to build additional fixtures. However, the owner doesn’t want the store to all look second-hand, so he’s willing to spend $500 on a few slatwall fixtures, planning to upgrade the rest of the store in 2-3 years. Adding up the supply cost, the cost of a cash-wrap, POS system, and miscellaneous equipment he hasn’t obtained yet, the FFE comes to $4,000.
Sample costs include
- Misc. repairs
- Contracted work
- Rent (including CAM or triple net)
- Utilities (electricity, water, phone, Internet)
- Labor (including tax and payroll service fees)
- Trash removal
- Pest control
- Alarm monitoring
- Bank fees
- Repair & maintenance
Sample Store: The owner is willing to do some of the work himself, except for the electrical work, for which he has neither the tools nor the training. Also, he knows that commercial suites have a history of building up stop-gap wiring above the drop ceiling, and he wants a pro to make sure the fire hazard up there is minimal. He plans on $1,500 for the electrician (who also replaces the ballast in all the light fixtures, something the owner learns is easy to do and will do himself from then on), $2,000 for flooring and $500 for miscellaneous tools and repairs.
Your inventory expense is probably the largest single category on your list of opening expenses. It’s also the greatest variable between stores. There’s no easy answer here.
Here’s a rule of thumb to help until you actually sit on the phone with a distributor for an hour or so and work out an initial order: figure on spending $20 for every square foot in your store devoted to retail. That is, take your square footage, deduct for your game space, bathrooms, office, and wasted space, and multiply by 20. If you use 1,200 square feet out of a 2,000-sf location, figure on spending $24,000. If you only have 700 square feet and you’re going to be using all of it for retail, figure on $14,000.
That’s a rule of thumb, which means it’ll be wrong for most of you. However, it’ll be close enough for planning at this stage. Like many topics, it’ll get more coverage later.
Sample Store: Our sample is a large-ish 2,000 square foot store. The owner knows it’s a bit of an indulgence for an opening location, especially with no local competition, but he plans an aggressive event schedule and wants room for multiple tournaments or demos in the game room, which will take up 1,200 square feet. Also, he has to sign a 4-year lease to get the rate he wants, so he’s going to be here for a while. That leaves about 750 square feet for inventory, which means roughly $15,000 in merchandise.
Note: as a general rule, I wouldn’t spend that much before opening. I’d spend less initially and hold back some of my inventory dollars to spend after gauging customer interest. If miniatures are hot for you to the exclusion of other game categories, you can buy more inventory in that category and maybe add a second line of paints. If you had instead spent 1/4 of that hold-back money on minis, 1/4 on cards, 1/4 on RPGs, etc. most of it would be tied up in slow-moving inventory and you’d be missing sales opportunities in your best category. Despite that distinction, you’re going to be spending this money in the first year, and it messes up the math if we count it under your capital reserve, so we include it here.
Sample Store: We’re up to $28,500 in pre-opening expenses.
Before you can calculate your capital reserve, you must determine your burn rate. Your burn rate is the rate at which you spend money before you start to break even. It’s a combination of your fixed expenses like rent and utilities and variable expenses. While technically labor is considered a variable expense, I include it under the fixed expenses category. That leaves for your variable expenses only the cost of replacing the inventory you sell on a daily basis. Our calculations assume that your inventory level remains constant, which it won’t–but we’ve already accounted for your first year’s inventory gain in the calculation above, so we’re okay there.
Finding Your Break-even—How Much
Add up the total of all of your monthly expenses. These include
and others. Include a salary for yourself. A healthy business pays its manager, whether the manager is you or somebody else.
One tricky amount to include is your loan repayment. You don’t know the amount of the payment because you don’t know the amount of the loan yet. Leave it out at this stage and then revise the break-even afterward to include the loan repayment.
For the items that you don’t spend every month, like your business license renewal, food permit, GAMA membership, CAM adjustment, etc, add up your annual expenses and divide that number by 12.
You should also include a “fudge factor.” You might forget to include a line item, something might cost far more than you anticipated, or prices might increase between your estimate and the date you make the purchase. There are two methods for including it. The first is to add a small amount to each line item. Personally, I prefer the other method: add an additional line item to your fixed costs. Call this category “fudge factor.” Make it about 10% of your other costs. For $4,000 in fixed costs, add $400 for your fudge factor.
The total of all of these line items is the amount you spend each month. Divide that total by .4 (or multiply it by 2.5, which is mathematically identical) to determine how much you’ll need in sales each month to pay those expenses. For your convenience, I have a break-even analysis that I’m willing to share here (XLS File). Fill in the numbers specific to your store as you gather your figures.
Sample Store: Without going into detail, let’s say monthly expenses total $5,000, requiring $12,500 in sales to pay the bills.
Finding Your Break-even—How Long
The trick becomes to calculate how many months you’ll operate at negative cash flow before you start to break even. I’ve done an article on calculating sales based on different factors, but it’s still heavily reliant on my personal experience. For the record, the majority of the plans I’ve seen or store sales records I’ve seen reach their break-even between months 13 and 16.
Sample Store: With a break-even of $12,500, it’ll take 9 months to reach break-even. Partial months round up. Nine months at $5,000 a month is $45,000 in capital reserve.
Using an online loan calculator like this one, your loan payment is $865 a month. Let’s add that to our monthly expenses and get $5,865 per month, or a total capital reserve needed of $52,785, which forces us to recalculate again, which will cause the loan required to increase, which…quit. Just use $55,000. I actually use a more complex version when planning, but we’re talking about back-of-the-envelope figures here.
Sample Store: Opening expenses of $28,500 and capital reserve of $55,000 means this store needs $83,500 to open.
As you can see, if this store owner has $30,000 available, he could afford everything he needs to open his doors. He’d even have $1,500 left in his bank account. One month later, he might do a thousand or two in sales, but he’d owe $5,000 in expenses before he even thought about restocking the merchandise that sold. He’s bankrupt already!
Believe it or not, some variation of this scenario is the single largest cause of business failure. The big variable is how long the owner can survive by racking up credit card debt, cannibalizing inventory, not taking a paycheck, etc., before he runs out of money. If you’ve learned the lesson here, you’ve increased your likelihood of success tremendously.