Covering the bases from the bottom up
This is the fourth in a continuing series, co-authored by Ron
Sturgeon and Greg Morse, founder and president of Worthington
Ron: One thing that I like to do is called
bottom-up planning. These days, it’s really easy to create a
spreadsheet and create a top line where advertising costs are
5 percent, labor is 20 percent and so forth.
But what about the metrics? Like with the
ice cream shop: how many scoops of ice cream are they going to
sell? Once they’ve figured that out, they need to extrapolate
that into how many cups and cones they’ll need to buy, how many
freezers they’ll need, how many employees they’ll need to scoop
all that ice cream. And if they’re going to sell 10,000 scoops
a day, how many tables will they need, and how big will their
lobby need to be to hold all those people, and how big a parking
lot it would take to accommodate all those cars.
I would say that 98 percent of the business
plans I see haven’t been looked at that way.
Greg: That’s a problem we see a lot. I know
of a couple of brothers from a foreign country who wanted to
open a restaurant in a small town. When they opened a checking
account at a local bank, the banker told them that in order to
be successful, they needed to be able to make a great chicken
fried steak. When they left the bank, the brothers asked each
other, “What’s a chicken fried steak?”
Ron: And it’s not just new businesses. Once
I was in a bank and overheard a conversation in the next booth.
The guy sold parts and provided services for 1964 through 1966
Ford Mustangs, and he’d been doing this for several years. He’d
been blindsided because all of a sudden his business had slowed
All I could think was, “How stupid is that?!”
There are a finite number of 1966-1968 Mustangs, and how many
people are out there to fix them? He hadn’t thought to expand
into servicing modern Mustangs, or adding some other car. So
now he was in the bank trying to get a loan to get out of this
bad situation he was in.
Greg: One of the problems we see a lot is
that people are managing for the quarter, not for the quarter
Ron: I am amazed at the bankers who’ve told
me stories about a customer who comes in and says, “I need some
money but I’m not really sure how much. How much do you think
I’m going to need?” That banker is absolutely not interested
in giving them any advice — and probably won’t lend them any
Greg: Another thing we don’t want to see
is three years’ worth of monthly historical financials. When
someone brings us a business proposal with thousands of numbers
in it, we get lost. Bring us annual or, at the most, quarterly
statements. I don’t usually need to see monthly statements.
Ron: What else do bankers want to see? You
want to see some skin in the game, right? What does that mean
in terms of down payments and equity and those kinds of things?
Greg: Never go in and ask a bank for 100
percent financing on anything. I want the customer to have some
skin in the game; maybe put down 20 percent on whatever it is
he or she needs.
Let’s say someone comes to the bank and wants
to finance a new bulldozer. The day it’s driven off the lot,
it’s not worth the $100,000 it cost, it’s worth $80,000. As a
banker, I’m already down to having something that is only worth
what I just financed. And if the customer has some skin in the
game, I know they’re going to lose some money if they have that
bulldozer taken away.
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Remember, only you can make BUSINESS
Ron Sturgeon is past owner of AAA
Small Car World. In 1999, he sold his six Texas locations, with
140 employees, to Greenleaf. In 2001, he founded North Texas
Insurance Auction, which he sold to Copart in 2002. In 2002,
his book “Salvaging Millions” was published to help
small business owners achieve significant success, and was recently
reprinted. In June 2003, he joined the new ownership and management
team of GreenLeaf. He also manages his real estate holdings and
investments. You can learn more about him at WWW.autosalvageconsultant.com
He can be reached at 5940 Eden, Haltom City, TX 76117, email@example.com or
817-834-3625 ext 6#.