About a year ago a fast food flame-grilled chicken outlet with a restaurant opened up in the local neighbourhood. The previous premises were completely refurbished at great expense, a new kitchen built, the table arrangement changed and the outside decor was modernised with the latest signage. The doors opened, the store traded for about 6 to 8 months and then shut down.
Just imagine how much money the owner put into this restaurant. No expense was spared at bringing it up to a level that matched or even in some cases surpassed the giant fast-food chain stores. Sometimes it’s like this. A would-be owner of a small business needs to start up with everything ready so that they can serve customers with the quality and price perception that they are trying to create. To go smaller or with less bells and whistles might mean a turn off for customers. Yet the risk of going full-scale is much higher because simply the market hasn’t been tested for demand.
You find this happening a lot. Small business founders conceptualise the entire business and start-up on day one with everything in place. It’s not a bad strategy – I’m not implying it is at all. It’s done all the time. Take a look at how the chain stores do it in shopping centres.
But is there a better way if you have a slim budget and want to test the market first before giving your everything, including your hard-earned savings, without any guarantee or certainty of demand?
Another small business owner without the cash pile of the first takeaway flame-grilled outlet, started differently. He was much more risk averse and decided to start a restaurant on a small scale without any frills to test the market. This was essentially a smaller project with a short-term lease that put a stop loss on the start-up business should things not pan out as he expected.
To his delight after about a year’s small pilot his restaurant was flying. A review from a national Sunday newspaper helped bring in customers. He was so booked out that he had to arrange chairs and tables outside on the pavement to cope with the demand, not only on Fridays and Saturdays but also on certain nights during the week.
Sharp entrepreneur reduces risk
For his step up to a larger scale restaurant, this smart business person decided to increase the size of his next restaurant but not too big. He wanted to make certain that his overhead was within a smart and of safety that could tide him through the more difficult winter months. His new restaurant is doing well but still has an overflow. He likes this. It’s far better for him to turn potential diners away than sit with empty tables in a much larger restaurant.
The point here is, as one top entrepreneur recently remarked, that lack of cash flow often turns a start-up into a failure. Because start-ups don’t make money immediately, he says, you might one focus on one of your small ideas first and then use this smaller businesses’ performance to leverage into a larger business. It pays to think upfront how you can test your business concept without too much capital outlay upfront and when it is successful, you can use the profits to scale up.