Mathematics of the Business

Sometimes, I wonder how many people spend the time to do the proper numbers for running a business in our industry.  I thought I’d put this out there since we seem to see quite a few individuals looking to do the low (low) cost route in Canada.  So, I thought I’d put up a little document for people to look over.  On the left is your typical B&M markup of 100%, on your right is the markup that a business like Cool Stuff Inc. in the South has – 30%.

I’m also using a very basic salary number here and winging a lot of the expenses – the 60% cost for salary is high but not uncommon among B&M stores.  I am also putting the packing numbers in there along with the inventory numbers, just to give an idea of the kind of workload difference you’d expect.  Obviously, it’s not viable to sell online at 100% margin but it does give a good comparison of the difference in workloads and inventory you’d have to see.  Turn rates of 6 are also really high, but I’m going to assume you are able to do so with such low prices.

The Numbers

 

Average Order Size $90
Gateway Processing Fee 2.80% $2.52
Shipping Revenue 15
Product Revenue $75
COGs (% Margin used) 100% $37.50 30% $57.69
Gross Profit $34.98 $14.79
% of expenses Salary equals 60%
Total Expenses No. of Orders required Revenue Minimum No. of Orders required Revenue Minimum
 $                        22,000.00  $        36,666.67              1,048  $   94,339.62                 2,480  $    223,158.55
 $                        40,000.00  $        66,666.67              1,906  $ 171,526.59                 4,508  $    405,742.82
Pack rate 5
No.  of Hours Packing Hours per Week No.  of Hours Packing Hours per Week
 $                        22,000.00                 209.64                4.03               495.91                   9.54
 $                        40,000.00                 381.17                7.33               901.65                 17.34
Inventory Requirements
Turn Rate 6
 $                        22,000.00  $        15,723.27  $      37,193.09
 $                        40,000.00  $        28,587.76  $      67,623.80

 

Bottomline

Is it viable? Of course it is.  Coolstuff is down in the USA – but they’ve got 10 times our population.  To make a decent living with the number of employees they have, they probably have a very large customer base and have to pack in more efficiencies (e.g. being able to lower their COGs, their gateway expenses and increase the packing rate).

However, using our current numbers which are somewhat inflated for a small business getting started. To make just $40,000 in salary (and breakeven everywhere else), you need to do $400k in revenue and spend nearly 17 hours just packing boxes.  You’ll also need at least $67,000 in inventory – in reality, I’d guess you need more like $80 – 90k.  That doesn’t include things like receiving, purchasing, updating the website, dealing with customer service, etc.  The cost of dealing with all that means you end up working very, very long hours.  It’s also why you might note that many of the online stores down in the States had really old websites – the margins were never there to update them.

As many FLGs owners say – the online game is a lot more work for a lot less money quite often.  If you win, you can win big like CSI but there are only a few winners, especially if you are going down the lowest cost route.