Most of us remember standing at the end of the driveway selling lemonade to innocent pedestrians. If not we remember the kids who did. Remember that little plywood stand or the sign hung from one of your parents' folding tables, rescued from the corner of the garage? How about the kids who used to rent out a corner space in the mall and sell lemonade from a counter that resembled a Zales Jeweler? No? Me neither. There are big lessons to be learned from the humble lemonade stand. Lessons about start ups and staying lean even as a big company. Lessons filled with words like fixed and variable expenses. Lessons many entrepreneurs need to learn.
The reason we never saw kids renting out mall space (not even a kiosk in the middle of the hall) is the same reason so many small businesses set up and fail quickly. It's all about cash flow and expenses. When you are selling lemonade for a quarter, you need to spend as little as possible to make money. Kids know this. Parents help. Can you imagine standing outside for hours and then finding out that you actually lost money? Lots of businesses do exactly that.
A crafty lemonade man (or woman) makes a simple stand with minimal expense. After that, the main cost is ingredients. These are variable expenses; they go up or down according to how much is sold. Of course, you need to stock up a certain amount unless you have quick access to the store to buy more in a pinch. This variable expense model is great for any business that is not making a huge amount of money. The alternative is a business filled with fixed expenses. For example, that rental space at the mall. The rent doesn't go down just because you are having a slow month. It's a liability that needs to be paid. That means that all your blood, sweat, and tears earn you no profit until you make enough to cover the fixed expenses. Mall real estate = a lot of lemonade. Convert this to whatever you do in your business. How much _____ do I need to sell to justify paying for ______?
There is an upside to fixed expenses too. Imagine that your business delivers to customers homes. You make weekly delivery runs and rent a delivery truck. If you have no delivery you have no rental so it's free. It's variable. But let's say that your business starts growing and soon you are making deliveries several times a week. Now the cost of renting a truck is far more each month than it would cost to own your own truck. In the case of the growing use of the truck, the fixed expense of a truck payment is a better option. It's something you have to weigh case by case. Of course your own truck can also have your signage on the side and be a rolling billboard.
The trouble that businesses get into is getting into too much fixed expense early on, when they don't have enough cash flow to pay the bills and aren't actually making enough use of the expenses to justify paying for them. They get expensive websites that do lots of things they don't need yet. They hire people far too soon. They rent office space for a business that can be run from home. This is the recipe for insolvency (i.e. not enough money to cover the bills and on the way to bankruptcy). Don't follow the insolvency recipe. Follow the lemonade recipe. Spend only on what you need. Get only as much as you need. Don't spend your start up money trying to look like a "legitimate business person." Even worse, are you trying to look like a mogul? Buy what you need to start creating cash flow, invest in fixed expenses when they make sense, and let your success make you look legitimate, not your company truck that mostly takes the dog to the groomer and your way-too-much way-too-soon office space.
What are some fixed expenses you need to take on and some you might want to leave until later? Post in the comments below.