A Second Look at a Bad Idea
In The Shoestring Game Store Model , I discussed a business model based on minimal costs and minimal inventory.
I also advocated—firmly—avoiding this business model.
I have not changed my mind that the shoestring model is a good thing. You can technically get started, but ramping up is difficult because you lack the infrastructure to build on. Most often, people who start like this continue at a break-even as long as they can afford their hobby of being a game store owner. When their significant other says they have to get a real job, they close.
However, like many things, there are circumstances in which you can improve the odds. Improve the odds enough, and you have a sustainable business model. Let’s consider some circumstances that could make this bad idea into a better idea.
Recap on Why It’s Bad
A quick reminder on a few of the more important negative points.
- Sales levels. With very low sales levels, a bad week could destroy you. You have no margin of error
- Risk. Hey, we’re talking about operating with no alarm system, minimal or no insurance, and not even a drop safe.
- Exhaustion. There’s a limit to how long you can work every shift every day. The shoestring model doesn’t leave a lot of dollars for employees.
- Inventory levels. It’s not feasible to expect $250,000 in sales from an inventory level of $5,000. However you plan to grow, increasing the amount of stuff you have to sell is a necessity.
- Specialization. If you have very little capital invested in your merchandise, you probably focus on only a very few product lines. If those lines falter, you’re crushed. Security comes from a broader product offering.
Now back to ways to make it less bad.
Itty Bitty Living Space
Low rent was the spark behind the previous article on the shoestring model, so I’m not going to expand much on it.
A tiny storefront simplifies your cost structure and operations. You need fewer fixtures. You can only fit so much inventory in it, which reduces your cost on that front. You can control shoplifting better when you can hit all your shoppers with a stick without leaving your counter. If you don’t have a game space, you avoid the problems that come with that space (you also forgo the benefits that come with that space, and you’ll take that into consideration with your planning).
Who Needs Money?
The first swing in your favor is an outside income. If you don’t have to pay yourself a salary, you remove a very large expense from your spreadsheet. Maybe your other half earns enough to sustain you both. Maybe you work nights. The reason doesn’t matter as much as the math. If you’re paying attention, you know that labor dollars are your most expensive dollars. For each buck you spend on payroll, you pay taxes, payroll fees, and (in most cases), worker’s compensation, etc., to the tune of $1.13 to $1.25 in total spending. Large companies, which provide more benefits and face greater exposure to liability, spend even more on labor.
Taking no pay isn’t something I normally recommend. As I’ve said before, I valid business pays its manager, whether that manager’s an owner-operator or an employee. However, the concept isn’t entirely alien. Working with no or reduced income so that you can reinvest capital back into the business is called sweat equity. It would be the same if you worked another job and then spent that money on the game store (except that, because of the taxes, working the other job would be less efficient).
If you reinvest a $30,000 annual salary into your businesses, and you started with a budget of $10,000 (the amount I estimated you could launch a shoestring on in the previous column), then after that first year, you’ve spent a total of $40,000 on fixtures, inventory, equipment, and other needs. You’re in the right ballpark.
Money Comes Later
It’s hard for start-ups to get financing (or insurance, or anything, really). You cannot get an unsecured loan, and the business won’t have enough assets to get a secured loan. Banks know that businesses who survive for a year or two are beating the curve and are more likely to be able to repay a loan. If your plan involves financing in phases, and Phase III involves a bank loan in two years, you need to both survive two years and be prepared for the loan when you reach that point.
If this is the case, you’d better have a very solid expectation of a loan. As in, you know the bank’s requirements, and making sure you hit all their benchmarks is a top priority in your plan. If your plan relies on outside financing, and you can’t get the outside financing, your business could be threatened. Set very clear, specific goals. For example, you might want to get $30,000 from a bank loan, secured by the $30,000 worth of inventory you plan to accumulate by then.
Let’s assume that you set your store up so that it breaks even after about $2,500/month and you start seeing positive cash flow soon after opening. Where do you spend this cash?
Spread the money around as you grow. The majority of it should bulk up your inventory, but spend some on marketing & advertising, improving fixtures, developing your brand, etc. At first, spend evenly on administrative needs (insurance, business license if you didn’t start with one, etc.) and inventory. After you’ve taken care of that, you might spend an 80/10/10 mix, with 80% going toward inventory, 10% going toward letting people know about the new product lines as you add them, and about 10% toward fixtures for the new inventory. For an additional $2,000 on inventory, for example, you might need a new bookshelf. Or a new set of pegboard shelves and hooks.
You might spend this mix until your inventory reaches about $15,000, then spend a smaller percentage on merchandise and more on the other factors: technology, brand management, advertising, and maybe hiring a part-timer to give you a break for one or two shifts a week.
As you can see, it’s possible to start with a shoestring model. Your end goal of the shoestring model is to get out of it and into a sustainable plan. If you attempt it, you must have a detailed and realistic plan for that. It’s also extremely important that you have a low-cost method of pre-opening marketing and advertising. Real life and online networking can pay off well in excess of their cost.