Business Scalable Discuss the Limitations and Challenges  Case Study

Excerpt from Case Study :

business scalable? Discuss the limitations and challenges.

One thing that often holds companies back from scaling up is the presence of "irreplaceable" staff or management, or management that believes itself irreplaceable. A company is not scalable if the management duties cannot be delegated or trained. Too often entrepreneurial ventures rely solely on the time, energy, vision and skills of one person. Even before the financials are brought into play, Alison should carefully consider whether or not opening another location would even be possible within her vision of tight control and being involved in the minutia of everyday decisions.

Beyond whether or not the business is scalable in terms of Allison, the question then needs to be answered in terms of financial considerations. As she moves more inventory and can buy more inventory from jean manufacturers, her incremental costs will decrease based on her higher volume of purchases. One thing which may work against her in this regard is that she carries so many different lines of jeans, tops and jewelry in her stores. If she cannot build up her orders from the companies substantially, they have no reason to give her a bulk discount; she will be paying just as much to sell her 50th pair of jeans as she did her 5th.

Alison also needs to get over more of the humps on her learning curve. In order to scale her business up to the next level, she cannot rely on nascent family members to take care of her financials for her. Exactly how much bigger can her business grow on the financial experience of her uncle? If she were to open another location, or even expand sales significantly in her own store or use a more complicated accounting system, could her uncle keep up? If she chooses to upgrade to a more sophisticated accounting software system and outsource some of the work, and possibly upgrade to a state-of-the-art point of sale system can allow the room for scaling up without re-investment.

The other thing Alison should realize, which does not seem apparent in her 5-year projections, is that noting is infinitely scalable. Her anticipated increases in revenue seem unreasonable compared to the anticipated investment. Her projections shows an increase in profit from $19,000 in the first year to $384 in the fifth year without opening a second location and only doubling her marketing expenses.

Scalability also requires that the possible revenue actually exists in her customer's discretionary spending budgets. Is she counting on an unlimited supply of such customers, or is she banking on repeat business. Has she considered how often women will buy new pairs of jeans, and has she perhaps over-estimated that number?

2. What tasks and goals should Alison be focusing on at this stage of her venture?

At this stage of her business's development, Alison needs to turn her attention to several different matters if she expects her business to continue its early successes.

First, she needs to focus her efforts on hiring staff that she finds suitable for her store. From reading the case study, it is clear that Alison is too personally invested in her business. While it is true that the company has spring from her vision and work, she is not the company, and the company is not her. If she wants it to grow, she needs to work on giving up some of her need for absolute control. Several examples of this cropped up in the case study. First is that Alison went into the business world with too many demands on, well, everyone. She had demands for her investors, and she played hardball with everyone who even showed a marginal interest in working with her. While these risky moves paid off early on, Alison should not count on such luck following her through all her ventures.

Alison also exhibits an extreme amount of control over her employees -- interrupting them while they are trying to make sales and inserting herself into places she could easily delegate, like loss prevention.

Because of these management mistakes, Alison needs to first focus on hiring a replacement employee for the sales girl who just quit and then figuring out a plan to train a salesperson whom she can actually trust to do her job. Alison should probably move her desk off of the store floor and let her employees do the work of "selling." She will never be able to do the work necessary to grow the business if she is continually being distracted from that work. Also, Alison can never learn to both manage other people and delegate to them, her business will never grow beyond what she herself can manage.

Alison should also look to cultivating more investors if she has eyes on expanding to another location and growing her business by adding more floor space. She is locked into a three-year lease on her current location -- would it make sense to move to a different location, or to add one? Alison should set herself to thinking about long-range planning, as soon as she has worked on her management skills enough to let some of the daily tasks give her the breathing and visioning space she needs.

3. Discuss the signing of a lease prior to having the money. What was the risk?

The obvious risk when Alison took the lease is that she would never get the money and would be locked into a lease that she could not honor. This seemed especially risky since the owner of the property was especially choosy about his tenants. He had turned down other proposals before, and if he could not find a tenant he was happy with, she would be on the hook..

The risk was mitigated by the fact that she received a few months free and she was certain that her plan to obtain investors would work. With the space in hand, so to speak, she could go to investors and have a plan, and proof that someone besides herself believed in it. If she did not have a lease in hand, why should the investors believe that she would miraculously come up with the perfect storefront? It did certainly help her case with investors that the location was no slouch of a spot. This all panned out for Alison, and she was "shocked" that she got so many replies. Without the location, she may have attracted no attention at all, and thus no money.

If Alison had not been able to secure the money on her required schedule, she also could have mitigated the damage of signing the lease. She could use the free months she had to change her terms with prospective investors or expand her list of contacts. She could look for a co-signer for a bank or SBA loan as well.

4. Discuss her fundraising and valuation. If you were an equity investor, what return expectations would you have?

The process of valuation can be challenging, especially for a new business with no track record. Valuation -- determining what a business is currently worth -- is all forward-looking and involves the personal perspective of the person coming up with the valuation.

In Alison's case, she determined the value of her company based on first year's projected sales of $375,000 with start-up costs of $125,000.

Her first two fundraising efforts failed. She was turned down by Boston Private Bank because they insisted on a co-signer, which she refused, wanting to take full responsibility herself. She was also unable to secure an SBA loan because she had no collateral and was paying off student loans. She looked into grants but was unwilling to go through the long process.

She offered an alternate plan to investors -- they would not be able to choose how much to invest, and the options were full equity, debt/equity or full debt.

Her father took one share at full equity; her uncle took debt/equity, one colleague for all equity, an investor for all debt and the final two for all equity. The last investor wanted two shares for 15% equity instead of 12.5%.

As an equity investor, I would want to take a long-range view for Alison's company and not expect much of a return in the first few years as she built her company, As a shareholder, however, I would also expect her to respond to her investors and our more experienced view of business planning.

5. If women are coming to Alison's store from all over, how important is location? Discuss the implications on growth.

Alison chose to locate her store in Boston's historic North End, which is known more for its Italian restaurants, bakeries and pizzerias than it is for shopping. However, her location is not that far from a well-known shopping district, and the travelers in the North End tend to be trendy and have money, which is just the kind of customer Alison is looking for.

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