Can a business survive scaling back?

[james klein]

I am currently stuck in a "start up" mode with my cabinet/ furniture business. I operate primarily out of my home/ garage and have associates whom I can call in when in need of larger equipment, which means tranporting parts to their facility.

It has been the objective from the onset of the business to keep the overhead to a minimum. I have managed to acquire much of what is needed in terms of equiptment outright, but there are several, somewhat essential, larger items that would require more space and a higher budget.

The space is also a must to accommodate the manpower -needed to generate enough revenue to sustain the next phase in business growth.

As an alternative to financing and taking a big leap into higher expense without the immediate means to cover it. I have an opportunity to pursue more lucrative, temporary, work elsewhere as a means to accumulate a bit of a nest egg to help with the much needed transition.

My only fear is that, with the lost momentum there may not be a business left to expand.

Any thoughts or suggestions are greatly appreciated!

[gordy haycock]

Of course a business can survive a "scaling back" and still survive. It happens all the time. Only you know if YOU can do it.

There are two theories to starting a business. 1)"The Field of Dreams," if you build it they (the customers) will come theory. This requires a lot of upfront capital, time, advertising, etc. This is usually done after a thorough study has been completed so you know the demographics and that the need and demand is there. You just have to open the doors and customers will come.

2) "Boot strap method," which is what you are doing. Start out slowly, get only the essential equipment needed, advertise by word-of-mouth, and keep employees to a minimum. With this method you grow your business only as the customer base increases. Thousands of business have been started this way.

Look at your customer base; are they repeat customers who will expect you to be able to meet their needs the next time they place an order? Will they go elsewhere if you can't? Are they also your salesforce, in that they generate your sales leads by referring you to others?

To keep the business going, even on a smaller scale, you must continue to serve your profitable, repeat customers, and service their referral business. If you have already been advertising and new customers approach, tell them "your pipeline is currently full and you can't take their order as you refuse to provide less than great service to them." Then refer them to someone you trust.

Or, are the majority of your customers "new" customers? If you don't have much repeat business, it is easier to scale back and still survive. Although you should probably look into why you don't have more repeat customers. Just accept the most profitable new customers and let the marginal ones go elsewhere.

I think it would be extremely difficult to "totally shut down" the business and then restart it again in the near future. One of the most difficult things to do in the business phase is to jump to the next level: in your case, renting out more space, buying more equipment, advertising, etc. This takes capital and guts. But, it is what is often needed to grow.

Good luck!

[Mark Blatter]

You don't say how long you will be gone, or if you will be close enough to still do occasional work. How long have you actually been in business? If it has only been a short time, you might be able to tell potential customers that you are away for short period of time, but again, you don't say how long. If it is a month, it might not have any impact. If it will be 6 - 8 months, then nobody will wait until you return. You will most likely start not from scratch, but in the hole. There is a certain amount of trust involved when a customer gives you their work to do and if you have shut down once, they know you can do it again.

[james klein]

It's going on 5 years. I do have a number of repeat customers and the referrals they generate, so I don't intend to completely shut down. It will however be impossible to get any projects done in a desirable timeframe. The work I would be pursuing has periods of flexibility, but it's unpredictable. So I will need to be careful with what I take on and worry that word will spread that I am declining new work. I'm also concerned that the efficiency that's been developed will be compromised in periods of absence.

In regard to the 2 approaches of starting a business (as outlined by Gordy)...which is preferable?

Is it a gauge of the businesses potential in this area if it's tough to take the next step with the "bootstrap" method?

Also is ever beneficial to change approaches?

[Kent Adams]

It's going on 5 years. I do have a number of repeat customers and the referrals they generate, so I don't intend to completely shut down. It will however be impossible to get any projects done in a desirable timeframe. The work I would be pursuing has periods of flexibility, but it's unpredictable. So I will need to be careful with what I take on and worry that word will spread that I am declining new work. I'm also concerned that the efficiency that's been developed will be compromised in periods of absence.

In regard to the 2 approaches of starting a business (as outlined by Gordy)...which is preferable?

Is it a gauge of the businesses potential in this area if it's tough to take the next step with the "bootstrap" method?

Also is ever beneficial to change approaches?

James, I'm a commercial banker and have been for 25 years. I spend all day evaluating businesses, all kinds of businesses. Over the years, I've had thousands of customers who have started their own businesses, inherited businesses and purchased businesses. One thing all of them have in common, with the exception of those that inherit (whom often don't know a thing and kill the business they inherit), is the lack of financial knowledge of how to run a business......in the beginning. There are common factors shared among all of the successful ones, no matter the type, from the general contractor building commercial buildings, to the guy that built a high tech company. Two of those common factors were taking jobs he didn't want to do in order to do what he wanted to do and never going to "work". However, they all stayed within their industry and they all had the ability to sell sell sell sell. I don't know enough about your business to give you any insight as your question is far too vague with no background or context, but if you'd like to PM me, I'll try to coach you on what you're doing right and wrong from my experience and share with you what I've learned from various successful entrepeneurs. There really isn't a difference in any of them, no matter the industry. They all have very common stories and common attributes. One last common factor of the successful ones, they didn't listen to conventional wisdom because they had a very narrow focus.

[Peter Aeschliman]

We definitely need more information, and you should be extremely skeptical of any advice you get on an internet forum. Get to know some successful people in your field and convince them to mentor you. Get to know some people who know the financial side of businesses like yours and have watched many of them come and go (like Kent above).

That said, let me give it a shot.

My knee jerk reaction is this...

If:
1) you have a business that scales- meaning your fixed costs stay (generally) fixed and there is a break-even/reasonably profitable business in sight, and
2) most of your business comes from word of mouth

You should not walk away from it. You have to tend to your business or it will die. And since it scales, it's worth tending to. If there's no profitability in sight, you should walk. If your business doesn't scale, then more infrastructure and overhead will kill you.

As for whether to consider taking leave to save money to upgrade your facility or machinery, you may not have a business left by the time you come back with the cash. That's not to say you shouldn't do it necessarily, but I agree that you should expect to be starting over. And worse yet, for your existing clients, you might raise fears that you aren't financially secure because of your period of absence or long lead time. People don't like writing upfront checks to businesses that may fold (I'm picturing individual consumers prepaying for new kitchen cabinets). If there's a perception of risk from potential clients, you might not get the referrals you've been getting today.

If you have good profits in sight, you might want to consider taking out a loan to do your upgrades. You need to sit down and do a careful forecast of your business. Debt is not always bad- leverage can be a good thing if you have growing cash flow that could be better if you could make some capital investments. It's probably obvious, but if a capital investment (machinery, facilities, etc) is holding you back from more revenue, and making that investment will produce cash flow that meaningfully exceeds your interest cost, debt may not be a bad option. The bank will want collateral though.... So you have to be wise about it.

But letting your revenue drop off and starting the word of mouth cycle over again would be pretty brutal.

That said, ignore everything I said above and talk to some professional financial advisers and some people who are successful in a trade-based business.

Good luck!

[james klein]

Thanks, you guys, for some awesome insight.

I admittedly arrived on the scene armed with my woodworking talents, unwavering determination, and no clue how to run a business.

I am fortunate enough to have some veteran colleagues who have given a nudge or two in the right direction but stay pretty tight lipped when it comes to any of the real vital information.

I have also, since realizing what I had gotten myself into, explored some literature on the subject. Most of which does not seem relevant to the limited size of my operation. I have yet to find anything that offers any instruction on how to facilitate growth in a low risk manner. There are many principals I have learned that I look forward to implementing when I do get there.

I hope I haven't gone too far askew with this thread. I assumed there would be others out there who had been in very similar situations. Or, as you've proven, some intellegent enough to keep woodworking as a hobby, and gain business merit in other fields!

[Bruce Wrenn]

Businesses are capitalized in two means. First borrowing (bank, credit cards, loans from friends / family, etc) and second is First Bank of the Left Hip. It seems that you have chosen the second. While it's a GREAT feeling to be debt free, it isn't always the best interest of your business. Your growth is limited by your EXCESS profits, meaning the money left over after paying bills, and yourself a living wage. I have had a full time / sideline business/ full time business for years. While being employed by others, I still kept my business up. This meant that I was working TWO jobs at the time. If you "park" your business, don't expect your existing customers to wait for you. Plan on starting over when you can get back to your business. What happens if you "park" your business, and new job goes south? Then you have neither.