Here’s One Question Never to Ask When Seeking Funds

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“If a banker asks how much money you want to borrow, and you respond ‘how much will you give me?’ you’ve just disqualified yourself,” Madeline Marquez, VP at the Business Initiative Corporate of New York, told an audience of 200 at the Javits Center, as part of a panel discussion on how start-ups should access capital for their business.   It shows you haven’t done your homework, you haven’t prepared, Ms. Marquez explained.   She advised audience members who may be seeking SBA-guaranteed loans to start by filling out the SBA form 912 for key management, and the SBA form 413 if you are checking out different banks.

Moderator Steve Cohen, SVP with Empire State Development, led off the panel discussion with a review of various New York State programs and resources to fund and support entrepreneurship.  Programs mentioned by Mr. Cohen included the following:

Ed Lynch, VP and Credit Relationship Manager for Flushing Bank said that loan seekers need to submit a business plan which should address the following:

  • Sources and Uses of Funds
  • What % equity will they put in to purchase equipment, working capital, real estate
  • How are they going to repay the loan
  • If an existing business, what is the company’s history
  • What is the past background of the principals, and why are they going into this particular line of business
  • Detailed description of the product/service
  • What is the revenue model, what is the customer base, and the demographics

Finally, Dan Vacarro, VP of the NY Business Development Corporation rounded out the panel, mentioning that he pays special attention when loan applicants are passionate about their business.

 

 

 

 

 

 

 

Ten Watch-Outs When Launching a New Food Product (Part 2)

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Based on my experience helping numerous clients put together financial projections for the launch of their new food products, I put together a list of ten items you want to be sure to consider when pulling together financial projections for a new food business. Items 1 through 5 were covered in a previous blog post, this is the remainder of that ten-item list:

#6. Food Broker – A client of mine was using a food broker to service their sales to a well-known West Coast retailer, and was not getting any repeat sales. They switched to a different broker, who found the problem: the retailer had never pulled the product out of their wholly owned warehouse. So clearly you want to choose the right broker. But a good broker will go far beyond what your distributor is willing or able to do in terms of checking on your product at retail, and facilitating communications between you and your retailers. From a budgeting standpoint, plan on brokerage expense running at 5% of revenue.

#7. Credit card fees – This is an easy item to overlook, but if you do any significant sales on-line, fees you pay to credit card companies can add up quickly to become a significant expense item. Additionally, if you ship directly to smaller retailers, one or both parties may find it advantageous for payment to be by credit card, at a rate ranging from 2 to 3% of revenue.

 

#8. Liability Insurance – Even if you are operating as a limited liability corporation, or a C-corp, you still want to protect your corporate assets with the proper liability insurance. There are a lot of things that can go wrong in the supply chain and create potential liability for you. Put a line item for liability insurance in your business plan financial projections now, as a reminder to get in touch with an agent experienced in placing policies for food manufacturers.

 

#9. Taxes – If you’re not sure about all the various taxes which will apply once your business launches, invest the time now to ask someone with that expertise. In New York City, where I am based, unincorporated businesses have to pay an incremental 4% tax for the portion of their income which is allocatable to New York City. Plan accordingly, and you won’t get taken by surprise when the tax bill comes due, or worse yet, goes unpaid.

 

#10. Pay Yourself! – It is a surprisingly common mistake for entrepreneurs to forget to build a suitable salary for themselves into their initial business plans. This often goes hand-in-hand with pricing their products too low. Remember that the salary you draw compensates you for the time you put in the business, and if possible should be commensurate with what you would earn if you were doing the same type work on the open market, while any profits that ultimately come your way are a return on the capital you have invested in the business. These are two different things, and one does not substitute for the other.

Ten Watch-Outs When Launching a New Food Product (Part 1)

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If you have decided to embark on the launch of a new food product, you should have a financial plan which captures the expected revenue and costs, so you understand the required investment, and don’t unexpectedly run out of cash before you hit your breakeven point.   Based on my experience helping numerous clients put together such projections, I’ve developed a list of ten items you want to be sure to consider when pulling together financial projections for a new food business.  Numbers 1 through 5 are discussed below, and numbers 6 through 10 are in a subsequent post:

1. Yield loss –  It is not sufficient to simply cost out your bill of materials and multiply by the number of packages or cases you project you will sell.   Invariably, there is going to be some “yield loss” of purchase raw and packaging material, i.e., material you purchase which does not make it into the final product you ship.  The exact amount which is lost will vary based on the nature of your product, the ingredients and packaging material you use, your production process and controls, and whether it is produced in small or big batches, along with a host of other factors.    If you are self-manufacturing, you should make efforts to closely measure your actual material consumption on a batch-by-batch basis, which will give you a better understanding of how the material you consume may exceed what makes it into the finished product.   If you are working with a co-packer, you should push for a conversation about what yields they are experiencing, (and if they can be improved), as ultimately you are the one who is paying for them.

2. Quality Assurance / HACCP – If you are self-manufacturing, and have not yet developed and implemented a HACCP plan, you will be required to soon as the FDA steps up regulatory efforts to assure the safety of this country’s food supply.   HACCP stands for  Hazard Analysis of Critical Control Points, as described in Title 21, Section 120 in the Code of Federal Requirements. Unless you are yourself a food safety expert, or already have one on your team,  this will probably entail hiring a consultant who has a strong background in good manufacturing practices and food safety.  The cost will vary depending on the complexity of your manufacturing set-up; a client of mine was quoted $15,000 to write the HACCP plan by an extremely qualified consultant.  Just getting the plan in place is only the first step, you then need to have to have people trained and available for the ongoing record keeping which represents the “C” in Control.  This could be an added expense.

3. Scheduling factors – If you think realistically about the sales demand for your new food or beverage product, you will realize that it is impossible to know the weekly fluctuation in sales, which may be a problem, since your manufacturing capacity will probably remain fairly constant.  This will leave you one of two options:  1) Make to ship or 2) Make to order.  Either one has an added cost which is easy to forget to build into your plan.   “Make to ship” will likely involve some unabsorbed factory labor in the slow weeks, and perhaps some overtime payments in the weeks in which you push to meet peak demand.   “Make to order” involves tying up cash and space with inventory.   You need to anticipate which method will work best for you, and plan for the resulting costs.   If your product is to be manufactured by a co-packer, unless it is a perishable product, they will probably prefer to do the bulk of your production in less-frequent, long continuous runs and any requests on your part for them to do otherwise may trigger higher co-packer charges from them to you.

4. Free goods / slotting allowance – Once your product is manufactured and packaged, you are ready to get it on store shelves, and see how many consumers buy it each week.  But there may be a catch.  Because of the high failure rate for new items, many retailers will charge you a “slotting fee” to shelve your new food item, to help allocate some of the cost of these failed products from them to you.   There is no industry standard for what this fee might be, but in some instances it has run as high as $25,000 per item to get it shelved in all of the units of a major supermarket chain.   Some retailers might stock your new item for less, and others may accept “free goods” as an alternative, it’s up to you to negotiate, and find retailers that are less harsh in what they demand to put you on their shelves.   According to Forbes, today 13% of food manufacturers’ revenue goes to trade spending, which includes both discount programs as well as slotting allowances.

5.  Sampling – In-store product demos are a proven way to make consumers aware your new product is on the store shelf and consider buying it for the first time.   Demo costs include the person or agency you hire to run it, the cost of the product and any miscellaneous supplies.  A client of mine with an early stage food product has been spending $15,000 to $20,000 per quarter on demos, just to give a sense of how the expenses can add up.  They are in a very competitive category, and need to give consumers a reason to switch.  But the alternative may be worse: if your new product doesn’t show sufficient “case turns” after an initial time period, the retailer may delist it, and then you have lost the opportunity to sell plus your initial slotting allowance.

Whole Foods Local Forager Advises Start-Up Entrepreneurs

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Whole Foods Market local “forager” Elly T. advised an attentive group of 30+ entrepreneurs on how to apply and thrive in her company’s local supplier program, speaking at a meeting of NY Foodies on 3/19/13.  Here is Elly’s advice:

  • To be considered for the Whole Foods local supplier program, go to your local store and ask to speak to someone in grocery leadership or store leadership.
  • Every store has its own autonomous decision making authority, but the leadership team is always busy, so if you don’t hear back the first time, try again, don’t get discouraged.
  • If you are accepted, that is where the work begins, you have to be ready to compete, e.g., by funding demos, so consumers will become aware of your product.
  • Don’t get caught up in product claims, and be especially cautious about putting claims on your front label.
  • Know what your top values are, you might not be able to afford to be all things to all people.
  • Success is often based on the entrepreneur building a strong relationship with Whole Foods and showing commitment to their brand.

Here are NY local vendor profiles, to see some of the success stories to date.

Truckee Retailer’s Successful 32-Year Run Explored

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On a recent vacation in the Sierra Nevada town of Truckee, California, my family and I wandered into La Galleria, a retailer which sells “gifts from around the world to….create harmony within your home, beauty within your soul, and function within your daily life.”

La Galleria has been in business for 32 years; here are some of the keys to this long-running success:

  • Skillful buying  – their buyer looks for unique items while on her monthly trips to a variety of locations
  • Thoughtful merchandising – at a variety of price points
  • Layout – the small store holds a surprising range of items without looking the least bit cluttered
  • Relaxing ambiance – the Latin music in the background made me want to stay, not leave

So if you are ever in Truckee, by all means, check out La Galleria at 10112 Donner Pass Road,  to see for yourself how all these elements come together.