A Start Up Trek – Rules of Thumb, the Revenge

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A sketch of the various entities interacting with a typical business, MindGear.A sketch of the various entities interacting with a typical business, MindGear.

MindGear’s interactions with various entities. Drawn by me. And yes, I took a picture of the drawing with my iPhone.

I am starting a new public accessible prototyping lab in Huntsville, Alabama, called MindGear Labs based on the fab lab model. I’ve dreamed of becoming an entrepreneur and have done a fair amount of research on the topic. But this is my first attempt at starting a business. Here is where I document weekly my mistakes and successes in creating a business from the ground up.

First, sorry for the delay on this post. It took me a lot longer than I planned to draw the accompanying image. I found that Sunday night I had no time left to write this post. And after the time I put into the sketch I didn’t want to just slap together a post.

So the sketch. You may have heard of the engines of commerce. I see an engine as a metaphor for business now, and I sketched out how that engine works so I could understand it more completely. The typical engine uses the chemical energy of a fuel and converts it to work, generally in the form of a rotating shaft that can turn a wheel, or a generator, or a pump or fan, etc. A business converts raw materials into finished goods, and people’s time and expertise into money.

However a business is also a distribution system. A typical engine ends at the driveshaft, and requires a transmission to deliver work to where it will be put to use. In the sketch, the business accepts materials, work, knowledge, and money from dozens of different entities and flows out cash to most of those entities and finished goods to the customers. (A service business would deliver services to customers instead of finished goods).

Back a few posts ago I talked about how I wished I could find appropriate rules of thumb for operating a business. Since then I found several rules that I wish I had known about when I was writing my business plan. So here I have shown the major benchmarks that apply to all of these different entities that interact with MindGear. Most of these benchmarks are obvious, like the hourly rate I would pay employees or consultants. Each entity has its own set of major variables.

A lot of the benchmarks I found are focused on the financial health of the business. For instance the debt to equity ratio evaluates how well the business rates as an investment. Other ratios are the quick, or acid test ratio, and current ratio. These ratios require a pretty detailed understanding of business financials. Even I find this stuff dry and my attention is focused by the fact that I am risking most of my finances in betting that I can make MindGear profitable.

Some of the benchmarks I found specifically apply to how I should plan on operating MindGear, and there has been some controversial press in the last week regarding these benchmarks. Many of these benchmarks apply to gross sales. I’ve mentioned in the past the rule of thumb to spend 5-10% of gross sales on advertising. Another is gross sales per square feet. Here we divide annual gross sales by total square footage of the retail space. Obviously this is a term used mainly for retail sales, and MindGear is a hybrid between memberships and retail. But I’ve found it worthwhile to consider this number. My references have suggested a goal of $200/sq. ft. for most retail spaces. Consider that last week the New York Times reported that Apple Stores attained $5,647/sq. ft., a value not even approached by other major stores. Tiffany’s clocked in at around $3,000/ sq. ft. and the other stores compared to Apple hovered around the $1,000/sq. ft. mark.

Another benchmark covered in the New York Times article was annual gross sales per employee. Apple again tops the list at around $473,000. Here is where the controversy comes in. With an average wage of $11.91/hr for store employees (or about $25,000/year) the Times suggests that Apple is not sharing enough of the profits with its employees. Forbes referred to this article as ‘Impotent Whining‘ and several other print media sources also chimed in with their disdain on the New York Times slant. I don’t know what to think. I have my iPhone in my pocket and my iPad next to me with these articles pulled up, so I have a vested interest in how Apple operates. I have to say though that an Apple Genius has a much easier time selling a half-million of products every year by having the Apple brand behind them, the well laid out stores in great locations (still working on my location – grumble, grumble) and the products that fly off the shelves.

Speaking of that, another benchmarks is days of inventory – how long it takes to sell what you have on hand. So if you keep $20k in inventory, how many days does it take to sell that much of your product? And this benchmark is calculated not with gross sales but with your cost to buy the inventory, commonly known as cost of goods sold. Again Apple is an undisputed leader turning over its inventory every five days. When I hear these numbers I only sigh and think about when Microsoft had to give Apple money to prop them up as a competitor. Strange how things can change.

Another ratio is number of customers per employee. A store that expects you to help yourself, like a big box retailer or warehouse might have a ratio as high as 8-10 customers per employee. A specialty store that looks to provide a high level of service to the customer might run at a ratio of 3 or lower per employee. I expect to run somewhere in the middle of that.

Some other benchmarks would be gross sales per transaction, and markup. Those benchmarks vary wildly from one industry to another and since MindGear is in an industry all its own, I haven’t been able to find a lot of data that was helpful to my situation. But these sorts of benchmarks are still important because I can track them from year to year and see how I’m performing.

I see all of these benchmarks as knobs to turn and adjust to maximize the effectiveness of MindGear. In reality though I don’t know ahead of time where these knobs should be set. The data I’ve collected gives me some comfort that I know generally where to set things, but for instance I won’t know whether I need an employee for every four, five or six customers until I start operating and see how things go. Hopefully I’ll be in the right operating range on all my knobs; that way my engine won’t explode in my face when I first crank it.

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