And How You’ll Avoid Them
You’ve heard the horror stories of small business failure. You know that about 110% of them fail in the first five minutes and the rest fail before lunch. In the discussion on negotiating rent, you read that landlords don’t expect you to last out the duration of the lease. When you ask for financing, you know the bank looks at how much of the loan they can recover when, not if, you fail.
Yet, you’re still reading. Either you’re completely narcissistic and don’t believe that you can possibly fail at anything, ever, or you have some confidence that enough planning will help you avoid the worst pitfalls and push the odds in your favor.
1. Undercapitalization
If you read How Much Do I Need? and accurately estimated your costs, you’ll overcome the largest hurdle right away. Learn this lesson: if you can’t get enough capital to do it right, do not start. Other people might have gotten lucky and achieved success despite this error, but it’s unwise to count on luck as part of a business plan.
If you do this one single step correctly, you’ve shifted the odds in your favor. It’s that important.
2. Improper Tax Management
Research accountants. Hire one. Talk to him or her. Follow the advice you receive. The biggest tax-related mistake that new store owners make is assuming that all of their purchases are tax deductible. One big one—the biggest—is not. Inventory is an asset, and a gain in inventory is considered profit. If you grow your inventory by $20,000 over the course of the year, you’ll owe income tax on that $20,000.
Likewise, consider your personal tax liability, also. Set up your payroll so that your income is only taxable once. Paying taxes twice on $36,000 a year can crush your cash flow worse than any overordering you did throughout the year.
If you do set up a corporate structure, learn the requirements for that structure and protect them. You might think you’re home free because you created an S-corp for your company, but if the government tells you that you lost that standing because of an oversight on your part, you could be stuck with one or more years of tax liability. Consult your accountant over any changes you wish to make to your ownership or financial structure.
3. Cash Flow Management
If you’re bad at this, you’ll run out of money. It’s “game over” at that point. Pay attention to your checking account. If you use a line of credit for your capital reserve, draw on it as necessary. If you need to refinance an outstanding note to stay solvent, do it and worry about the loss of profitability later. You’ll only have the luxury of being able to do that if you keep the doors open.
Having strong inventory management skills allows you to exercise great control over your cash. Create a buying budget or some method of knowing when you’re spending too much. You have to develop discipline in your inventory purchasing or you’ll empty your bank account quickly.
4. Insufficient or Ineffective Advertising
What’s your advertising budget? How do you set it? Where will you spend these advertising dollars? How will you track your success? What is the best advertising medium for reaching your customers? If you don’t know the answer to these questions, you’re probably not paying enough attention to the advertising part of your business model, and you’ll suffer because of it. You must continue to bring in new customers because you lose customers on a regular basis. Even if you do everything right, customers still move, die, get married to people who hate games, etc. If you’re not gaining customers at a rate higher than your attrition rate, you’ll fail.
Advertising to your existing customer base is cheap and easy, but it fails to bring in new customers. You’ll have a newsletter and bulletin board and all that, but how do you get new customers? Advertise on TV, run ads in the local paper, hire banner-wavers to hold signs by the street? You have to do something. Identify what works and do it even when sales are slow.
5. No Competitive Edge
Why do people shop at your store instead of one of the other purchasing options available to them? If you don’t know that before you open, don’t open. However you answer that question, use that answer as your benchmark in all of your business planning. You have to know how you’re better than an online store, how you’re better than a chain bookstore, and how you’re better than other local game stores. Compete on your strengths and minimize your losses to their strengths. Whether your strength is breadth of inventory, game space, atmosphere, or unique product offering, know what it is and leverage it.
6. Poor Growth Management
If sales outpace your financial projections, it’s a time for excitement but also a time for caution. Growth, especially rapid growth, can kill a business. If you fail to keep enough employees to deliver good service, you’ll lose customers. If you hire too many, you’ll spend more in labor than you can afford. If your inventory level is too low, you’ll miss out on sales due to frequent stock outs. If it’s too high, you’ll lose cash to inventory creep. If you mistake seasonal changes in sales for actual growth, you can make some damaging mistakes. If you move to a large place to accommodate more inventory or a larger game space, you might fail to meet your more expensive rent when sales return to their first-quarter sales levels.
The most noticeable and risky growth steps are opening multiple locations. Wherever you aren’t present, performance suffers. It’s likely that nobody else in your company will ever be as efficient as you are for various reasons. If profitability at your first store is 10%, the second store might only break even. Worse, it might lose money, risking destroying your entire company.
Bonus: Reason Businesses Don’t Fail
Fortunately, most people who start a business have some skill at doing their job. If you make it past the other obstacles, you aren’t likely to fail because you’re a bad game seller. Most people going into this industry know at least one game category well. That will probably be the leading category for you at your store. If you’re a card-flopper, you’ll probably sell a lot of cards. If you push lead, you’ll sell miniatures. Go with it.
Gamers have something of an advantage here. Knowing what elements to promote and which to ignore is a natural talent. Magic players know that an opponent’s life total is not important if you’ve established table control. Likewise, chasing margin is a fool’s game if you’re bouncing checks from a lack of sales. Board gamers, familiar with resource management, have some ability to judge the relative merits of an expensive but good location and a cheap but less-desirable location (hint: if the cash you save on the cheaper place can bring you more customers than the better place’s visibility can, go cheap).
