expenses

let's say you have been in operation for a year and you're thinking about rewarding your workers.. remember your biggest asset is always the people running operations for you.. without them, you may as well be the one running the place, and if you want to do something else, then they are your biggest asset.. investing in the right people allows your business to expand and grow.. likewise having the wrong people working for you can only turn the business the other way around..

the biggest expense in any business is rent.. you can manage your rental, you have a fighting chance in the business.. and the second largest expense is head-count.. the more people you hire, the larger your payroll, the lower your profitability.. this is assuming that monthly sales turnover is the same from month to month..

but while rental is a fixed cost and payroll is a fixed plus variable component depending on number of fixed (permanent staff) and variable (part-time staff).. staff should be looked at more as an asset than a cost centre.. nevertheless, rent and payroll are necessary expenses that need special attention..

rent needs to be paid up promptly and on time.. this allows for better negotiation when it comes to rental renewals.. relationship with the landlord must always be good.. never never default on rental payments.. or delay.. it shows that you have a problem with your business..

payroll.. it needs to be paid on time as well.. a paid worker is a happy worker.. that's the whole reason why people work for anybody.. they don't work for the company.. they work for money.. if they can have money from an alternative source.. there is no need for them to work.. but how does a company build loyalty with its employees? it's by simply paying your workers on time.. and making sure they are treated fairly in terms of the business..

rewarding good workers and helping the weaker workers realise their full potential is what every manager should do.. yet at the same time, if the business is not picking up as well as you would like it to be.. a nominal increment can be a good motivation for the worker to put in more efforts..

this can translate to bigger smiles, more attentive to customers needs, extra mile services for customers, etc.. for part time staff, increments of 50 cents per hour is standard practice.. there is no real need to increase per hour wages by the dollar.. start at the base wage of $5 and assess the worker from there.. some companies have a three months probation where they keep the worker at that wage until they have proven themselves well.. but i prefer to assess them from the day they start work.. they are already putting in the time for the business.. and how they perform will affect the business.. and if there is ownership in the worker.. there is definitely potential to increase their wages..

as for permanent staff.. the way to assess them is on a broader scale.. how does the manager measure performance for the permanent staff? while it is fair that the permanent staff is the one that assess the part time staff.. the management assesses the permanent staff..

there are two ways of measuring performance.. one way is by getting to know your staff.. knowing them personally allows you more insight into their work ethics and how they see themselves in the business.. and the other way of measurement is to track sales.. if sales increases from $300k last year to $320k this year.. there is an increase of $20k.. take this amount and divide it by last year's performance.. you will have a percentage of what the increment for permanent staff should be..

in this case, it should be 0.006 percent increment.. it may be a pittance, therefore, the nominal increment comes in.. and typically $50 is nominal..

always remember increase in sales may not be equal to increase in profit.. however, a payroll budget can be set aside annually to pay for such expenses like bonus, hong bao during chinese new year, part time staff increments, variable bonus (based on performance)..

lone ranger mentality

if you noticed the style that i write, it's usually coming from a standpoint of a lone ranger.. the mentality that i am trying to drive across is this.. "i must take ownership of my own business" and that's essentially a very important thing.. this is your own business.. and therefore you should take a keen interest in everything that's going on in the business.. if you noticed i have stopped using the word cafe and more the words business..

the cafe that you have in your mind is in reality a business that incorporates every function of a business.. it bears the characteristics of every business firm in town.. the only difference is the nature of the business.. and in this cafe it is in food and beverage.. namely the cafe business..

as the boss of the business.. you must be willing to get your hands dirty.. and i don't mean pressing a shot of coffee or learning how to make pasta.. those are the operational aspects of the business.. but also to learn how to manage people so that your staff love you and treat you as a peer.. or handle a difficult customer.. or control food and beverage wastage so that revenue earn will be higher in relation to tighter cost control.. learning accounting principles and how to depreciate assets.. and in a wider sense marketing the business, and selling yourself as the owner of the business.. networking with other channels to bring in more business.. social entrepreneurship.. etc.. the horizon is as wide as the desert.. it's how hard you want to work to find your oasis..

having a lone ranger mentality forces you to learn every aspect of the business right down to the all important governement regulation on businesses pertaining to food and bevergae businesses, hiring and firing, workmen compensation, duty of care, legal implications, what can be done and what can't be done.. and what's the grey area.. we will deal with these aspects one by one..

and it is also true that every newbie entrepreneur faces a gazillion amount of obstacles.. pressure from oneself, pressure from love ones, pressure from internal and external circumstances.. and often times it takes a certain type of character to pull through their entrepreneurial ambitions.. the newbie entrepreneur must eat, wake, sleep, think and move like an entrepreneur.. the entrepreneur must harden their emotional state if they are easily swayed or soften their approach to doing things if they are too stubborn in their ideas..

but know this, the day you declare yourself as a newbie entrepreneur.. you're going to be thrown into the limelight of being ridiculed, rub shoulders with nay-sayers, and basically dining with people who think you're mere puff and that you're not gonna make it.. you're gonna be faced with challenges like a lack of funds (most of the blue collar workers face this obstacle) and half the time you're doubting yourself and your ability..

BUT you must NEVER show it.. because all at the same time.. they are also watching you.. tracing your every move, hearing your words, relishing the confidence that comes out of your mouth.. delighting in the adventure of your inspirational story.. you are taking the journey that they all wanted to take but never got the fire and determination to see it through.. they envy you..

always take what people say with a large pinch of salt.. they mean well.. but also note that they don't have your entrepreneurial mindset.. make friends with people that are already in business.. learn their speech, learn their mentality, learn their business acumen.. learn from their experience.. it's a priceless moment if they even chit chat with you over simple matters.. and whatever they share with you.. process it.. crunch the numbers.. and feed on it.. entrepreneurs love feeding off each other..

surround yourself with both supporters and nay-sayers.. it's always good to have your critics around you because they keep you on your feet.. and from a standpoint of a zero-hero, you can only be successful because they already see you as a failure.. or rather.. they already have the mindset of a failed entrepreneur and they are placing their inhibitions on you.. don't let their words get to you.. they are merely being introspective of their own entrepreneurial aspirations.. and with your supporters, network with them to widen your horizon.. simple because you might want to engage yourself in other forms of business in the near future.. never limit the business opportunities that come by your way.. some may be red herrings, but there are gems in the rough that need a little shaping work..

sometimes i wake up a cafe owner, and sometimes i wake up a jobless entrepreneur.. it's your attitude that determines who you are.. not what people say you are..

urgent important

when you're just starting a business.. it is very common to get lost in the whole mess of information.. and things to do before starting.. and sometimes it can get quite frustrating.. and the last thing you want is to hit a bottle-neck here and there.. and that's why you should document the whole process..

start with the first thing that you must do right down to the final thing.. and you will be able to start up your cafe smoothly.. i know i still haven't dealt with specifics as yet.. but all this will come in due time.. i rather get the entrepreneurial mindset correct right from the start than to dive straight into what needs to be done..

one important skill that i learn is to classify everything that comes my way as the following quadrant:

urgent, important
urgent, not important
important, not urgent
not urgent, not important

with this simple assessment tool, i am able to focus my energies more appropriately and effectively.. how to use the above quadrant? simple..

urgent, important - appointment with potential investor
urgent, not important - received an sms from a friend to go watch a movie
important, not urgent - deadline to submit design plans for the cafe in august when it is january
not important, not urgent - watch phantom of the opera

with the above examples, you know immediately how to prioritise your time.. the potential investor is probably going to invest in your business idea.. and the appointment with him is definitely urgent and important.. you got to prepare your business plan and brainstorm potential questions that he may ask you..

and during the meeting, you received an sms from your best friend of 10 years asking you to go watch a movie that ends its screening in about an hours time.. the sms is urgent as it keeps interupting your meeting.. but really.. it is not important.. you can turn off your phone and focus on the more important issue..

and the investor asks you if you had already submitted the design plans for the cafe.. it's very important because design of the cafe must be perfect.. but the submission deadline is 3 months from now.. it may be important, but it's definitely not as urgent for the time being.. you can put it one side and come back to it..

and as you're wrapping up the meeting, your friend suggests that you go watch the phantom of the opera on sunday.. this is clearly not important nor urgent as the last performance date for the musical is 2 weeks away..

i found the quadrant useful in helping me decide what is important and needs my attention immediately.. i hope it helps you too..

D.I.S.C.

now this can be a rather extra topic.. but it's quite essential for the entrepreneur to have a certain kind of mindset.. most people will tell you that you need to have grit, a strong mind, a creative mind, blah blah.. but all that can sound like someone telling you some airy fairy theory about doing business..

let's take a more structured approach.. and see what kind of entrepreneur you are.. and perhaps after doing this simple analysis of your own personality, you can ascertain if you're suitable for business or you're unsuitable.. and if you're unsuitable, what can you do to address this anomaly.. personally i believe our personality can be altered to suit the situation.. and most of the time.. the situation doesn't alter to our expectations..

so what is D.I.S.C.? this is basically some personality assessment tool to assess our personality.. i don't have all the tools with me.. but what i can offer here is a scaled down version of what it is really.. the gist i will share with you.. but the moulding part - of your personality - only you can do that.. starting your own business is all pretty much about how badly you want it.. where your heart is, there you will find your treasure also..

"D".. some say dominant, domineering.. blah.. "I".. some say influential, inspirational.. blah again.. "S".. some say steady, simply-bo-chap (aka anything also can) and "C".. some say cautious, careful, (i say stingy or kan cheong)..

i used to be the "S" type of personality.. everything also bo-chap and laid back.. and i realised why some businesses fail, is because the management is too laid back and bo-chap.. they leave everything to chance.. and that's not a good thing.. so i decided that i need a whole array of all these personalities combined to make my business work.. and the only way to build up the "D" and the "I" in me.. is to work in a sales position.. and yet at the same time maintain the "S" personality..

the "D" personality allows me to make spot decisions on critical matters.. while the "I" personality allows me to work with people with different skill-set and also acknowledging that i can't be an expert at everything.. the "S" personality allows me to take criticisms as feedback.. and not to take it as an outright confrontation of my decision making.. and lately i have been trying to cultivate the "C" personality in me.. to make myself become as detailed as possible in my research, and fact finding..

this DISC thing is important because in order for you to execute the different functions properly, you need to call up these personality traits.. the idea is to become the balanced DISC person.. while most of us have a dominant trait.. it's important to find the right balance..

when you're a well-balanced entrepreneur, you will be able to make informed decisions at all times.. they may not be the best decisions, but they will be the right decisions and unemotional..

classic scenario:
if someone was struggling out at sea and shouts for help..
"D" personality - will not think twice and rush into the water to save the person.
"I" personality - will look around for help and get as many people involved.
"S" personality - will think that it's not that serious and take his time to get help.
"C" personality - will assess everything from water conditions and think the worse case scenario before acting on anything.

know your personality type and train yourself to function more in the other personality types.. it could make the difference for your business..

the constitution

now i assume that you have done your due diligence and thought about the whole process of getting the funds.. you probably realised by now that opening your own cafe is much more than just selling coffee and selling cakes.. it's more than that.. it's a business.. and essentially you will have to equip yourself with skills almost immediately.. skills like human resources, accounting skills, planning and organisational skills, sales and marketing skills, operational skills and on top of all that, you need to know how to run and operate a cafe..

so it's not just making good coffee or cooking al dente pasta.. there is much more behind the scenes.. and knowing the big picture helps you in not losing the vision and hope in starting your own cafe..

so you have decided probably that the best way of funding while minimizing risk is to come out some capital from your own savings.. how much control of the business you want will also determine how much you invest from yourself.. if you can cough out the money from your savings that's the best scenario, but most businesses are birthed from a combination of the 3 sources of funding as described in my previous post..

ideally, you should have a controlling share of the business if you're working with investors.. that means 51%.. you are the entrepreneur.. and therefore you should set the direction for the business.. and the basic motive for the business is to make money.. and you need to keep shareholders happy..

shareholders here refer to the people that invested in your ideas.. in your business plan.. in your dream cafe.. =) so in other words, you are now accountable to them.. and you have to come up with plans and strategies that will make their hope in you profitable.. essentially people invest in people.. because the cafe is essentially about the people.. without the brains behind the operations, without the expertise and dedication.. the business is dead..

so you're a very important person in the business.. you're the key personnel in the running of the business and the direction where the business should go..

one very important thing that many people don't do.. and sometimes it can work against them.. and that's the simple matter of a constitution.. the constitution determines who makes the decisions that affect the direction of the business.. and how shares are transferred and moved within the organisation.. the constitution determines who gets what share of the business.. and basically it is like an agreement between the partners of the business.. if you're the sole owner of the business.. there is no need to have this constitution..

also, when you take out a loan from the bank.. if you ever succeed.. you must know that the bank is not your business partner.. they merely lent you the money.. if you repay your loan on time, they are your good friends.. the moment you default on payments.. you're as good as finished.. =) so please never borrow from the bank, especially for a cafe business.. the interest rate is too high and for a new business that hasn't seen its first dollar in profit.. the last thing you should be getting into is debt that grows..

sources of funding

there are basically 3 types of funding.. this is a fairly easy topic.. so i won't delve so much into it..

1. savings

savings is a fairly popular way of funding your business.. and most people if they have worked for a fair number of years.. take for example 3 years.. they should have a tidy sum tucked away.. but the problem is most people don't plan to have a cafe and most definitely most don't save up for something so big.. most people save to buy this gadget or that dress.. however, there are a fair few who save up money for that one big expense.. the wedding..

2. borrow

borrow is the most common way of funding your business.. you're young and you're enthusiastic.. zealous and full of bright sparks and ideas for turning your business into a gold mine.. you can either borrow from your parents or relatives simply because they know you.. and one look and they will know if you're convinced about your own ideas.. however, if you're not convinced yourself that you will succeed.. please don't bother asking them for a loan.. you're just digging your own grave..

an alternative to borrowing from your parents or relatives, is to borrow from the bank.. but the problem is.. they will require a business plan from you.. and most banks won't bother with lending you the money because you're potentially entering into a high risk venture with almost no unique selling point other than yourself and your ideas.. the fact of the matter is.. you will most definitely make mistakes and most probably lose all your money.. that's the bank's perspective.. and the only way to get that loan from them would be to get someone to be your guarantor or you can mortgage your house.. that is probably the most foolish thing to do.. never be a guarantor for anyone.. and never mortgage your house.. don't be stupid..

3. investors

putting the word out that you want to do a cafe is the first thing to do when wooing investors.. of course if you already have an established track record for starting successful businesses.. there is often no lack of investors.. but you're the newbie.. and you are not sure of your own business concept yourself.. convincing an investor that you're going to make money according to a timeline is going to be a tough one.. you need to convince your investor that your business vision will not change and that it will stick firmly to the business plan you put before them.. you forecast profits like a professional, tying up lose ends and close up gaps in your business plan.. the investor takes the bait.. but note this..

they are not going to put in $100,000 of their money whereas you put in nothing but your expertise and expect a 50-50 profit sharing.. more than often what happens is your business, your baby, becomes the investors and you're just a worker.. if you want to have equal say in the business.. make sure you have equal shares in the business.. that means you have to cough out your share of the 50% of the business..

ascertain if your investor is going to be a sleeping partner or if he wants to take a proactive role in the business.. find out what his expectations are.. and put it down in writing.. make this the constitution in your business..

investors are investors because they know a good investment when they see one.. so if your business plan sucks.. please fine tune it.. and make it less sucky.. be aggressive when canvassing for funds.. show that you are in it for the long haul.. (so that means you can't straddle that high paying job and work the cafe) work your sums and make sure they make sense.. investors know a cash cow when they see one.. and they are most unlikely to let go of it.. so make sure you are comfortable with the level of equity that you let out to investors..

most important points:
1. make sure everything is written down in your business plan.. and whatever agreement is reached between you and your investor.. make sure it is written down in your business constitution..
2. never be someone's guarantor and never mortgage your house to the bank.. once you miss out on loan repayments, you're dead meat and your house will be seized..
3. never "borrow" unsecured loans from your credit card or cash on line or easy cash.. there is no such thing as easy cash.. and more than often it is the long arm of the bank that will strangle you in the near term.. note that credit card cash advance fees are 24% of the loan amount.. so essentially you're tying a noose around your neck if you take that option..

and repaying the loan by the minimum payment on that advice chit is not repaying the loan.. you're only repaying the interest levied on that loan and your repayments are not reducing the loan..

hope that helps..

how much can you lose?

the other question i always ask budding entrepreneurs is "how much are you willing to lose?" because the fact of the matter is.. business is so unpredictable that if you were to lose all that capital, (money that you cough out) would it severely alter your lifestyle.. would you need to jump off westin stamford or would you need to do something silly like slit your wrists because you're heavily in debt.. would investing the money into the business cause you to eat less, spend less? these are some questions you need to ask yourself..

ok let's pretend this is your current lifestyle.. in a typical singaporean context.. you're a young executive of about 25 years old in a respectable job, you're a graduate, and you have been working for 3 years now, and you're doing fairly well.. you're earning $3,000 a month.. 20% of your income goes into CPF, 10% of your income goes to insurance premiums, another 10% goes into transportation (mrt, bus, taxi), you spend 20% of your income on food, 20% goes into shopping, and you religiously set aside the remaining 20% of your income as savings..

that's about $600 a month multiplied by 3 years (36 months) = $21,600 (real savings).

you feel like there must be more to life than working for someone else.. you want to be your own boss! so you make a decision to invest $20,000 of your hard earned money into your dream cafe..

alot of times people think about what they want to sell, etc.. but really the first thing that comes to mind is location.. where are you going to set your cafe? where are you going to position yourself? a swanky location with lots of customers? or a hidden enclave with little or no human traffic? say you opt for the swanky location with lots of human traffic.. the shop space is about 1,000 square feet.. you're jumping for joy and the landlord tells you that the lease is a minimum of 2 years and rental is $5,000 a month and you need to put down 3 months deposit..

hmmmm.. sounds like if you sign the dotted line, you only have $5,000 left.. but you're definitely sure you want to do this.. and that you will succeed.. but note this.. you just signed a lease for 24 months.. which means you are legally liable to pay 24 months of rental.. and that works out to be 24 multiplied by $5,000.. $120,000 all in.. =)

ok.. so you're very confident that you would be able to cover all your costs right in the first month of operation.. you forge onwards in your quest.. in your mind you're thinking.. i have 3 months to make money.. i can do that! i am a genius.. i have what it takes!

so the next most important question is.. who is going to run the place? you? or someone else? if you say someone else.. then all that talk about passion for coffee and educating your customers is all crap.. =)

if however, you say, you're going to get your hands dirty.. you're gonna go ahead with your passion.. then please note this.. you're going to lose that fat $3,000 a month paycheck instantly.. and your lifestyle of high living would end abruptly.. =) you will suddenly realise that you have no time for your own social life, etc, etc.. the fact of the matter is.. running a cafe is a full time job.. and you can't straddle both sides.. so you have to give up your job.. in order to chase your dream..

your monthly fixed costs are as follows:
$5,000 rental a month..
$3,000 monthly income.. (assuming your current lifestyle doesn't change)

say you operate from 11am - 11pm.. that's 12 hours a day.. and you work 6 days a week closing only on sundays.. which works out to be about 26 days a month on average..

so technically speaking you have to make at least $308 (profit) a day ($8,000 divided by 26 days).. in order to cover your fixed costs..

ok let's take a breather and see where we are..

key learning points:
1. location most important.
2. labour second most important.

and you still haven't settle what you are going to sell.. =) still want to do your own business?