Investor Series – what is your productivity like and what you should aim for

One of the criticisms levelled against the Creative Industries is that productivity levels are too low.

Let’s be clear about this, I’m not talking about how hard you work, the hours you put in or even the daily rates charged. There is no doubt that the inputs are there. However, in more mature sectors companies become expert not only in creating intellectual property but also in developing multiple income streams using the same property.

What do we mean by this?

A good example of multiple income streams would be the way that an agent no longer just sorts out a book publishing deal but separately sells film rights, merchandising rights etc etc. So the £billions that have resulted from the Harry Potter franchise could not have been achieved if the only income stream was from book sales. In the same way TV companies sell their productions not just to the first organisation that commissioned it but also to other TV channels elsewhere in the world. Furthermore channel owners such as The Guardian and Channel 4 use their route to audiences to cross sell products … all those Guardian book shop special offers or products for sale on Channel 4 related websites. By comparison small product design firms often struggle to leverage the IP inherent in a product into other areas and their growth is limited by the funds they have available to produce and sell the product themselves.

So, a successful example of multiple income streams from a single idea or concept would be Matthias Megyeri’s Sweet Dream Security which apart from being a product range which has been licensed internationally it has another life as a set of exhibition installations (seen in the Design Museum and MOMA to name but two) and has resulted in residencies and other developmental opportunities. These are still fairly labour intensive income streams so they won’t massively improve the net profit overall but they do make sure that maximum return on the idea is achieved. Contrast this to the Wattson which whilst achieving international distribution has not yet moved into other areas and you’ll start to see what we mean by the difference between single and multiple income streams from the same piece of intellectual property.

Why do investors care?

Put bluntly this is about maximum return from each £ invested. Creatively driven folk, on the other hand, tend to want to move on to the next idea fairly quickly as they tend to be creators not managers; they are less interested in the cash cows of a business than they are in the rising stars. So where an investor would be pleased to see a whole herd of cash cows but relatively few rising stars a creative will want to see the heavens full of stars but might as well be vegetarian for all their interest in the cattle!

What difference will it make to the company’s profitability?

Well frankly, without multiple income streams there is a strong risk that the profitability of the company will go down as the income goes up!

MyCake data shows that the 1-2 person firms where the individuals are still working in the business rather than on the business will be doing very well if they achieve profits of about 50% for serviced based and 30% for product based businesses (lets ignore for the moment the totally lifestyle one person outfits, these are simply not investable as there won’t be an exit strategy for an investor). The challenge is that the ratio of people to income tends to remain the same as the company grows. So a 10-20 person design firm could see a drop in it’s profits to say 15-30% as more of the income is being spent on things like rent, insurance, servers, marketing etc and the company is no longer as lean as it was when it was two people in a garage working on their laptops. If it feels like you’re running to stand still and that for every project or order you win there’s still the same amount of work to do then you’re probably in this situation. Take a look at your profit % not just the £ to find out.

What can you do about it if you’re looking for investment?

Well you should expect that one of the things any investor will do when they work with you is to look at your range of products or services and look for ways to increase the income from them (ie with little to no additional investment in the product/service but by upping sales, reducing production costs etc).

If you haven’t started developing multiple income streams then clearly you’re not about to magic them up overnight just because it would make you more attractive to investors. However you certainly could sit down and cook up some ideas for new markets for the existing range, opportunities to leverage the IP through other channels, versions of IP that could be licensed to other companies etc so that you can show the potential to increase income and thus productivity without substantially increasing your cost base. Looking at it from the other side: a one trick pony is unlikely to be an appealing investment … too much risk, too few chances for success. The ideal message here is a focussed area of expertise (a tight creative core, unique capabilities and broad exploitation).  You may not have General Purpose Technology (like the combustion engine or the internet) but a unicycle is probably not going to take you far and wide.

If you can develop these ideas far enough to have a decent stab at what they might be worth to you in income over the next 3-5 years and can therefore build this into your mid to long term forecasts then you’ll be starting to get into interesting territory for VC’s. You could also consider hiring someone whose sole focus is to exploit existing properties whether that’s through licensing deals … if you do this make sure that they don’t get sucked into existing client management! Such a person might also be brought in to new projects not to contribute to the main development of the product or service but to consider early on what the additional revenue streams might be so that these are built in at the start not retro-fitted afterwards.

Other reading on this topic:

Will Hutton has quite a bit to say on the subject of general purpose technologies and The Work Foundation has a short piece worth reading on productivity in the Creative Industries called Innovative by Nature final.

Tags: business model, income, investment

Advice for the Recently Redundant

This is the first in a series of posts for those who have recently left the corporate world and are considering their alternatives. We will make a number of assumptions about such folks including:

• you have 10-20 years experience
• demonstrable success in your chosen field and a clear skill set be it in sales, marketing, logistics etc
• your skill set is complemented by management experience – perhaps a national or international sales manager or country/regional manager
• this means that you’re used to budget responsibility
• you’ve negotiated a redundancy package that has bought you 1-2 years breathing space
• nevertheless you have a personal overhead base (Mrs Moneypenny’s descriptions of her children as ‘cost centre 1′ and ‘cost centre 2′ comes to mind though there are those for whom this may translate as a yacht instead!) and therefore will need to find an income stream or two … and anyway you’d be bored if you didn’t

We won’t look at the corporate choices you could make afterall that’s what you’d work with a head-hunter to review. Instead we’re going to look at how you might apply this skill-set in a number of other ways and how this translates into the development of a set of income streams. In particular we will look at:

• the corporate bod turned consultant approach to leveraging your existing skills and network into an income
• the senior manager turned non-exec board director with portfolio of SME boards to sit on
• being helicoptered in as part of investment package to an SME … the angel or VC’s board representative, with or without an executive role
• starting your own business either in the sector you’ve been working in (thus leveraging your network and your knowledge of the supply chain) or in a.n.other sector of your choice
• looking for a senior role in a small but fast growing company that needs to boost its management, sales, marketing and finance skills (these are the most common holes that need filling)

We might also touch on the way you can use money and skills as an angel investor in other businesses. We will no doubt also cover some of the misconceptions and traps that people commonly fall into.

First of all however you have the challenge of becoming a little more self-sufficient i.e. now that the IT department isn’t there to keep your laptop running there are practical issues you need to solve quickly and with least hassle so that you come across as professional in this wider world of business and entrepreneurship. So lets answer a few of the commonly asked questions:

• Yes, you do need a business card. No you don’t need to hire designers or printers nor do you need to worry about logos. There are many DIY business card tools online that will send you printed cards as the output. We are fans of MOO as the cards are good quality (cardboard not too thin), the templates are simple and if you want something either with a logo or a picture on the reverse you can just pick from images you upload to flickr.
• No, you don’t necessarily need a title. If your qualifications indicate an expertise that you will be making use of e.g. chartered surveyor then sure put ‘Chartered Surveyor’ under your name on a card. However if you’re not really sure what you’re going to do and might put your toe in the water with a few different approaches why bother to have a title at all. Just explain yourself when necessary. Indeed picking a spurious title may in fact be off-putting … for ‘Independent Consultant’ read ‘freelancer’ for example.
• Yes you need a laptop, mobile phone and (depending on where you live) car. On the whole people you’ll meet won’t actually care what make or model of hardware you’re sporting. They are not signifiers of status in the SME or entrepreneurship world. In fact we’ve come across cases where driving a Porsche will lose you business because the client interprets it as a sign that the driver is spending the fees they are being charged on this not on the products and services being delivered.
• Now that you don’t have the support of an IT department you will need to get better at looking after your kit. You might want some help on this one. The big names such as PC World will gleefully sell  you service contracts by the likes of Geek Squad but, as with most other forms of insurance they make their money on the monthly contract that you promptly forget and don’t use. In the last few years a whole lot of small firms have sprung up who operate on a very local basis and provide technical support to SME’s. For example, Axos Assist work within a 25 mile radius of Thames Ditton. You may not need a service contract but just knowing who to call to fix the crash/delete/panic is very useful.
• You may need a CV but it will look different to one you’d use to win a corporate job. A CV is after all just a calling card and a summary of skills. There are things which can work just as well e.g. a report you’ve written on a sector or challenge, a piece of research you’ve done (which by the way will probably necessitate you calling a bunch of people you’d like to meet anyway to pick their brains and later report back to them the findings). The key point to think about amongst all this practical advice is WHAT DO YOU WANT TO BE KNOWN FOR? or put another way what work would you like to get paid to do and why would someone buy you rather than anyone else they meet in the street? Do you want to get paid to do, to think, to challenge people, to innovate, to invent???? Have a think on that. It is the answer to these things that needs to sing out from your CV, report or other calling card (by the way you might want to be known for several things, that’s fine, you just need several different calling cards … you are no longer defined or limited by your job title!).
• You will undoubtedly need to meet more people so work out where they hang out (both online and offline). If your network has essentially been your sector colleagues and clients and your internal colleagues then there are bound to be gaps. A paid membership of Linkedin might work as it will allow you to introduce yourself to people. For some sectors Facebook is used as a business tool. There are almost certainly networking groups in your area .. try a few out (do you really want to commit to a year of once a week 7am breakfast meetings without knowing who attends?).
• The sooner you can get to a point of feeling comfortable explaining where you’re at now and the areas you’re exploring the sooner  you’ll find ways to explain to others how the skills you’ve acquired corporately translate into value in other settings. You’ll also find that many outside the corporate world have a certain amount of reverence for ‘big business’ which may come as a surprise to your inside track on the political machinations, time wasting and general mismanagement that you’ve seen along your way
• You might want to make use of something such as Tactile to keep track of the business leads you meet … you don’t necessarily have to treat this just to track ‘customer’ leads but you do need a way to view the strands of discussions you’re pursuing.
• Find 2-3 people you can talk to about the routes you’re considering. These might be people who’ve been self-employed for a while, entrepreneurs, family friends etc. They probably won’t be corporate colleagues. This simply because unless they’ve worked out side corporates they won’t have much understanding of the challenges you’re now facing. You want a few people around you who have working knowledge of your new world. People you can use as a sounding board for new ideas or simply to act as a pick me up when you’re having a tough patch.

This is a bright new world you’re entering, freed from the shackles of hierarchy and the gag of the PR team. All you have to do is work out what role you now want to play, who would value this enough to pay you to do it and where you find such people. We’ll come on to that and the business models you’ll need to consider in the next post.

Tags: business planning, cash flow, customer, market, planning, self-employed, skills, strategy

Are your figures under-dressed?

High fashion businesses are often a money pit in the early years. Those first few seasons might only result in £3-5,000 of orders per season and yet the cost of sampling and PR let alone catwalk shows and salons will certainly exceed this income.

So how does anyone get going? There are several answers to this depending on which bit of the fashion sector you are in. If you are aiming to be the next Alexander McQueen then many would say that you need passion, commitment and to get noticed. Many would infer from this that your finance skills are less important. Indeed if you find a financial backer who will cushion you from the ups and downs in seasonal cashflow then indeed this can be the true. Camilla Staerke is one example of a name backed by an investor.

If however you want to build your own label independently or indeed if you want to maintain easy communications with your investors it pays to understand your numbers. There are a couple of key angles to this. You need to understand garment costing so that you know precisely what the unit cost is of each design you create. We rate F2IT as the best solution for independent labels … just looking at their customer list shows you that the likes of Christopher Kane, Eley Kishimoto and Erdem agree.

But production costing is not enough. You need to be able to make forecasts as to where your sales will come from next season and target the retailers who you feel would be a good fit for your brand. You probably need to hang out in some of those retail spaces to to get a real idea of how sales happen and why.

You also need to get a handle on the mix between online and offline sales. With such a huge growth in online fashion retailing you need to work out pretty early on whether you’re going to run your own store or whether you’re aiming to get stocked by one of the existing online retailers.

Sounds like a lot to handle, well yeah, kinda but honestly … you gotta be business savvy as well as creatively brilliant. Don’t just take our word for that, here’s Wendy Malem of the Centre for Fashion Enterprise explaining why business development matters as much as creative development … in particular check out her views on the finance needs of companies growing from creatively applauded but financially fragile to more robust global brands.

Wendy Malem speaking at Investment Matters in 2008 courtesy of CIDA and the ECCE project

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Look out for our fashion related giveaway later today…

Tags: CIDA, F2IT, fashion, finance, financial management, MyCake, Wendy Malem

Using statistics to get the most out of your clients…(among other tricks)

This post is a case study from Phil Nicholas, a music industry professional managing Emily Barker (a folk artist) and running a record label to release her music.

It is a time of rapid change in the music industry. Tried and tested ways of reaching customers, the products themselves and income streams for artists and record label have largely been replaced over the past five years and whilst the internet now boasts myriad ways of monetising your music product, many of these business are still in relative infancy.

The challenge is varied: people are buying less CDs and downloading instead, thus margins for labels and artists have been slashed. The piracy of music versus legitimate downloads has been a big issue, but coverage of this phenomenon often misses the wider point that now customers have experienced ‘free’ music, it is difficult to get them pay for music, even when legitimate outlets gain huge worldwide status (how many of you, for example, know that Amazon.com’s mp3 download store offers better quality mp3s for the same cost as iTunes, the market leader by a long stretch?)

Although reaching your current customers as well as gaining new ones still occurs via traditional methods such as press & radio campaigns to promote album & single releases and live touring, these are crowded media. Massively increased use of the internet has spawned new methods of fan contact and nurture via social networking sites, targetted content delivery (signing up for RSS feeds and email newsletters) and data collection at point of sale. The beauty of online trading is the ease with which data can be collected and presented to the user.

An example of this is online store Bandcamp.com, which is still in development but with tens of thousands of users. It allows the artist or label to sell both digital music downloads alongside physical product. The neat management tools supplied to the store owner include a stats page which lists the number of visitors listening to tracks on your page, purchasing items and importantly, from whence they arrived upon your page. Thus we can tell that over 50% of net traffic to our bandcamp page (http://emilybarker.bandcamp.com/) during the month of January has come via an embedded widget on the number 1 Wallander fan site (http://www.inspector-wallander.org/index.html). Needless to say we will be placing future advertising with them.

In order to widen our customer base (potential CD or download buyers and gig-goers) we employ a service at Musicglue.com which simply captures customer emails and location in return for a free download. The advantage of grouping your fans by location is to be able to inform them of events taking place in their area, a live show, for example.

These websites and other like them are becoming evermore simple for users to customize and exploit. So whilst a playlisting on Radio 2 and a national headline tour remain the most powerful ways of promoting an artist and generating merchandise sales at gigs plus CD sales over the internet and on the high street, a new artist looking to maximise earnings from lower-priced items sold in small quantities, can confidently monitor customer behaviour and collect payments on a global scale from the comfort of their home studio.

A gift from us to you….

…this Valentine’s Day

Emily Barker & The Red Clay Halo

Look Out For My Love

Phil’s next post will centre on how to fund the recording of an album when record companies are spending a tiny fraction of their previous expenditure in this area…..

Tags: client, download, management, monetise, music, promotion, reports, sales, tracking

How to create a budget (plus a free tool)

Do you know how much money you make? Or is it a case of “I don’t know – it depends on how the business is doing”.

Whether you are starting a business or growing, you need to know what you are trying to achieve within the business and qualify how you are going to reach your goals, then you can set a budget to help you reach your goals.

Setting goals that affect your bottom line or personal finances are often more motivational than setting a sales target.

This is not a glamorous job but necessary for your business – to control costs, identify problems and ultimately achieve profitability. Creating a budget should have an effect on your business … in particular it should enable you to:

• Set challenging but achievable goals for the turnover of the company and the payments to you the business owner(s) and the staff you employ … you want to be clear on how success in the business becomes success in the team’s bank accounts
• Plan for investment of profits into the ongoing growth of the company … be it investment in R&D, intellectual property, more staff, different skills, board members/advisors etc
• Plan for tough times … knowing in advance where you would make cuts if revenues drop and what the markers are for needing to implement these tactics helps make it easier to do this if the situation arises
• Manage the day to day costs … all the things that are almost invisible except when they are all added up … phone bills for those with international clients, travel in general, last minute couriers. These items can tell you quite a lot about bad business habits and offer the chance to cut costs without reducing the value delivered to clients
• Manage the cash flow challenges that come with projects, temporary staff or product manufacturing … if you have prior warning of when the cash flow hole between needing to pay others and getting paid is likely to occur, then you can negotiate an overdraft or manage the chunks in which you pay/are paid
• This is not an exhaustive list but will probably give you enough to be thinking about (i.e. if you’re not convinced by these reasons we don’t think you’ll do a budget whatever else we may say).

A budget is not written in stone – it is critical to be flexible and adapt to circumstances, have a plan B budget just in case. Indeed for those who come to enjoy excel spreadsheets (honest, some do) then we’d recommend doing an ‘optimistic’ and a ‘pessimistic’ version of both income and expenditure for the year. For those who are less keen you’ll find a ‘what if’ calculator in MyCake which allows you to use sliders and dials to set these assumptions, ne’er a spreadsheet in sight (though we think you should write a few things down as you do this otherwise you’ll forget).

I have laid out a few simple tasks to help you get control of your finances and make the numbers valuable.  You will also find a free tool to download at the end of the post to assist you.

TASK 1 – analyse the information you have to hand

• Evaluate every penny going in and out of your business so you fully understand what is going on
• Make sure costs are classified in correct budget lines so you have all the data in the right place
• Look back through the last TWO years and pay special attention to fluctuations. What is your biggest sales month? When are the low periods? When do you hit an expense high? Where do you blow your money? What percentage increase have you seen in specific supplies, overheads and in your sales? If you are a MyCake user, not only can you run a bunch of reports on your own business , but the benchmarks will show you where you sit versus the best and worst in your sector.

TASK 2 – do a first pass at a budget

• Create a base line budget as a guide to work from – start by separating your fixed and variable expenses
• Fixed items include rent, debt interest, insurance and other expenses that cannot be avoided and are predictable
• Typical variable items are salaries, materials, transport, and marketing. Don’t forget the associated costs – for example salaries should also include cost of hiring new people, benefits, NICs etc.
• Do use last year’s books as the start point for creating the budget for the coming year. You can vary it to account for changes you plan this year as a next step.

TASK 3 – take a look at the top line

• Your customers are the best source of information about sales projections – are your customers cutting back or growing? What are they predicting for the year ahead?
• Examining your sales can be by customer or by product depending on how you operate
• Remember that past sales, based on the booming economy or credit crunch, may not give the best prediction for the year ahead
• Build a buffer into your budget to allow for fluctuating prices in materials or loss of a big customer
• Estimate conservatively and create an average price you can apply through the year – eg basic monthly spend on travel or phone

TASK 4 – reconcile your costs and expenses

• Look for relationships between specific expenses such as marketing and your top line so you know where you can save at short notice.
• This also helps to plan a three month cash reserve to cover droughts in cash flow.

Having a budget allows you to be flexible.  You can see what the actual numbers are and if you are achieving your goals – it allows you to be able to make changes if you are missing or exceeding your goals. Monitor the budget at least once a month, make mini revisions and change your spending quarterly to make sure you’re on target to reach the goals.

Alternatively have a best case, worse case and happy medium budget so you can fall back or move up as necessary.

At the end of the day you may want to be able to compare your expenses to other businesses, via a professional association, to see how your spending compares to benchmarks in the industry. The more you can do to construct ‘norms’ for your company the easier it will be to compare these to the best in your sector.

MyCake has created an empty budget spreadsheet for you to use for your own business budget – click to download it: sales & cashflow. Feel free to email us if you have questions and please note that we accept no liability for the way in which you use this spreadsheet. I mean, we think it’s sensible, we’ve checked that the inbuilt calculations look right to, but no absolute promises!

Tags: budgetting, cash flow, cashflow, costing, management, planning, pricing

Starting the year by putting your business in good shape

No gym required (though this post might provide food for thought as you pound that treadmill) instead some wise words from the mandarins (sorry still on the Christmas puns).

How can you keep your profit high in a tough market whilst improving customer service and managing your cost base? Well there’s a sentence full of business jargon, lets illustrate that in terms that make more sense for a small business….

The tendency in a tough climate is for new projects from clients to get delayed whilst you still have to keep spending the same amount of money on staff and overheads. That’s not great for cashflow or profit but there are a number of things you can do to help the company through it:

• review the processes by which you manage the business
• review your client base and the things they buy from you … what trends can you see over a 2-3 year period? has there been a radical shift in the recessionary climate (ie what was true in terms of customer behaviour in boom years may well not be true in lean times)
• have a look at the market and your pipeline and work out whether you need to set up new products & services and perhaps stop some of the old ones … or even consider a more radical reinvention of the business
• learn from sectors who’ve adopted what are called ‘lean manufacturing principles’ … kinda like ‘just in time’ production (works for services as well as product based businesses).

Why think about this now?

Well quite apart from it being a good idea to review the business annually, ideally in one of your quieter patches in the year it’s also a sensible idea to set some goals for the year ahead and review the mechanisms by which you’ll achieve them. In a tough climate the rules may well be different so you shouldn’t assume that the things that used to work for the past few years will still hold true. For example do you?

• meet regularly as a team e.g. weekly teleconferences or meetings either for the company as a whole or by team or project … in these meetings you should be reporting on progress of main business activities, any delays or overachievements vs. forecast & deadlines
• track the orders you receive, projects you pitch for (and who wins them if you don’t) and the accuracy with which you meet delivery deadlines and customer satisfaction?
• have mechanisms for maintaining quality of output?
• manage expenditures against a budget (or do you just spend money as projects or areas of the business demand it) ie are you proactive or reactive when it comes to managing costs?
• have a mechanism for charging project costs to your client as appropriate?
• have a process for reviewing outstanding invoices and chasing for payment as required

Looking at the way you do things:

• look at which of your products and services sell best and look for common factors in these – are they new products or well respected older ones. What do customers value – quality, speed, price etc? Now look at the cost of these key products and work out the profitability of each one … there’s no point selling large quantities of things that take lots of energy but don’t make enough profit, that’s just running to stand still
• mapping out the way you make products & services and the other processes you employ for running your business is one way to visualise the way you do things. It also helps you spot ways to do things more efficiently … there may be processes you can combine or key components that you could use in more products or services
• once you’ve looked internally look externally … who are the leaders in your sector and how do they do things? What can you learn from them?

Review can lead to reinvention … this is a good thing … don’t get sentimental about the way you do things but do retain the things that make you unique (and that customers value!).

That said you don’t want to squeeze all the ideosyncrasies out of your company … you’ll reduce the chances of serendipity leading you into new places. Our favourite antidote to excess efficiency is The Salaried Masses – it’ll remind you why you like being an entrepreneur rather than an employee and with luck will stop you boring your workforce!

Finally, one more thing. Don’t cut your marketing budget … it’s often one of the first victims of cost cutting exercises but it only works in the short term. If you’re not marketing your goods you’ll struggle to acquire new clients or even to remind existing clients of why they prefer you to the competition. Those who invest in marketing in a tough climate tend to emerge ahead of those who don’t when the market picks up … there are lots of studies that prove this!

Tags: budgetting, cashflow, efficient, marketing, processes, profit

How not to tie up your cash in stock

Looking at the benchmark data for 2008-9 for those of you who make ‘stuff’ it looks to me like quite a few of you hold substantial amounts of stock. We reckon that holding too much stock is bad for cashflow, is a whole load of risk (there’s no guarantee you’ll sell it) and is not an efficient use of scant resources.

Whilst there is no single right answer to the question of ‘how much stock should I hold’ there are a few questions you can ask of your business to see what answer is right for your business, your customers and your suppliers.

• how soon do your customers need their orders fulfilled? 2 days, 4 weeks, 12 weeks? ie do you need to hold stock or can you order it in response to their orders
• how big are the orders? if they are small you will have to hold stock because your manufacturer won’t want you placing tiny orders but if they are large i.e. big enough to justify a production run of their own then there’s no point holding lots of stock
• can you separate out main line products where you need volume vs. made to order items … really you need to build this in to range planning so that you have as few constituent parts to main products as possible, this means you’ll hold more stock of fewer things rather than have a couple of each of a gazillion parts or products
• what are the sensible minimum order levels with your manufacturers and how long does it take you to sell this amount of stock?

There are also a number of stock related traps you should plan to avoid. These include:

• buying in quantities far larger than you need in order to get a bit more discount … this just reduces your working capital and changes your money from a flexible asset (ie cash) into an inflexible risk (ie stock is only worth what you can sell it for and there’s rarely a guarantee that you’ll sell it)
• buying parts that you ‘might need at some point’ or ‘will find a use for ‘ … chances are that if you don’t have something in mind it could be years before you find a use for such things! … again this just ties up cash into inflexible assets you can’t use in other ways
• allowing retailers to hold substantial amounts of stock on a Sale or Return basis … instead you want to allow the minimum of SoR and if retailers want volume of any item (even two pieces of the same pair of earrings) then they should buy this … after all they want it because they believe that they’ll sell the second piece before you have time to restock with them so they’re wanting to avoid loss of sales due to lack of stock.
• holding on to old stock with a plan to sell it for full price at some point … instead just sell it at a discount and release the cash

So:

• work out how many units you sell of your main products per annum and don’t buy more than a year’s stock of anything … preferably hold 3-6 months stock
• talk to your suppliers about your planned orders for the coming 12 months … see if you can negotiate pricing scales based on total annual order levels rather than individual order volumes
• do sell off old stock, discount as necessary
• limit the volume of SoR stock any one retailer holds, limit the number of SoR retailers you work with

Tags: asset, batch, financial, liability, management, manufacturing, production, products, stock

Ellen’s views on the 2008-9 benchmark data

Ellen O’Hara, Head of Business Development, Cockpit Arts and Sarah Thelwall, Founder, MyCake had a long chat about this year’s benchmark data over lunch this week and Ellen kindly agreed to pitch in with a contribution based on a comparison of the MyCake post on jeweller’s and her own experience with the data they gather from Cockpit members. The post below can also be read as a commentary on this post which compares the finances of designer makers and artists.

Some interesting observations here – many of which are supported by Cockpit’s own research into the business models employed by its studio holders.  Jewellers actually make up the biggest percentage of studio holders at Cockpit (22%), followed by textiles (16%) and ceramics (14%), so I’ve had a look at how each of these are doing and what we can learn:

Jewellers
We hold data on a similar group of jewelers to mycake – all sole traders, a mixture of precious and semi-precious, representing businesses at all stages of their career, including some part time businesses.  The main difference seems to be that a higher percentage of our guys outsource manufacture – nearly half.

Our figures also show that, generally speaking, those with relatively high production costs are either gem and/or gold based jewelers.  Or they are jewellers with relatively low levels of turnover (below £20k), but who are still investing in stock.  These tend to be either part-time business (and have an income from elsewhere), or start ups.

Textiles

Our research shows that textile businesses, along with jewelers, are among the best performing businesses at Cockpit in terms of overall levels of turnover and profit, and growth.  Our sample includes sole traders and partnerships, again ranging from start ups to established businesses.

The model here tends to be slightly lower gross margins, but higher volume of sales generated through a combination of wholesale orders, and direct sales via e-shops and selling events to the public.  The majority of these businesses fall under the printed textiles banner, producing homeware and stationary, and tend to outsource a large percentage of production.

Ceramicists

All of our ceramicists are sole traders with some catering for the fine market, some for the craft collectors market, and others the high end gift and interiors markets.
We’re afraid to say that these guys seem to be facing the biggest challenges in terms of sustainability and growth.

Despite the lower absolute cost of materials, direct costs are up to 60% of turnover for some start ups and up to 36% for some more established businesses.  This means that profitability and productivity tend to be lowest within this discipline.

What do the best performers have in common?

What’s clear is that the most successful makers are employing a diversity of business models and strategies.  84% have a strategic business plan, which includes detailed financial forecasts and budgets, and their business model is fit for purpose.

All have a strong USP, good profile in their chosen market place (however niche), and robust business processes.

The most profitable businesses are split between:
1.    Those with higher gross margins, who tend to sell smaller volumes at higher prices and generate sales through a mix of private commissions, direct sales (with Open Studios and other high profile shows such as Origin and Goldsmiths), supported by some gallery / retail outlet sales.  For this group, direct costs are a lower percentage of turnover (no higher than 26%), with the mode being just 15%.  They become sustainable at around the £60K turnover mark.
2.    Those who rely on a higher volume of sales tend to outsource production, and reach their market via trade shows, have a greater dependence on wholesale orders and on-line sales, and take on fewer private commissions.  Evidence suggests that turnover needs to higher in order to be sustainable at around the £100k+ mark.

So in addition to Sarah’s sound advice, I would add:
1.    Consider gross margins when developing your new pieces and collections.  Be aware of which products (or services) offer the most profitability and use this to inform your sales plan.
2.    If you can’t increase your margins and need to go for volume sales, ensure you have the production capacity to cope with this level of activity.  Explore different options – outworkers and batch production, outsourcing to a factory, collaborating with a partner who does have the production set up, or licensing.  Efficient production also means you are more likely to cut down your lead times, which will help encourage repeat orders and respond to those retailers who are employing a ‘just in time’ approach to placing orders at the moment.
3.    Being visible is important, but don’t fill galleries with SOR stock at the expenses of your cash flow unless you know from experience the work will sell and you’ll be paid in a timely fashion.  If you are a precious metal or gem based jeweler – consider SOR as a pr activity as opposed to relying on it as income – and be discerning about the outlets you choose to stock.  Do keep regular stock takes and pull your work out of outlets that aren’t shifting your work within 3 months (6 months max).
4.    Introducing a less precious range, or using a mixture of materials, may be a way of increasing overall profitability.  Similarly, you may be able to add value by introducing more ‘precious’ materials, or introducing optional product pricing and offering additional extras to bump up the value of each sale.
5.    Marketing budgets are interesting one.  On the one hand, if profits are being squeezed then you may need to shave costs.  However, this should not be at the expenses of sales.  Use a system like Mycake to conduct a cost / benefit analysis of the different marketing activities you engage in – how does the investment compare with the sales (and pr) gained, and under what timescale (in other words, what is the return on this investment and how long does it take to reap rewards?)  Could some, or all, of your limited budget be put to better use?

Overall improving you financial literacy needn’t be scary and crunching the numbers can actually be really satisfying once you know what you’re looking at.

Cockpit will be providing plenty of financial related support in 2010, so keep an eye out for our business and professional development events programme.

Tags: artist, benchmarking, creative, designer, MyCake

Benchmarking artists vs. designer-makers (2008-9 data)

We’ve been comparing MyCake data for 2008-9 between artist users and designer-maker users.

This makes for some really interesting comparisons between two types of object/product based practice.

• In both cases we are looking at sole traders (some have a ltd company others just registered as self employed).
• In both cases there are sets of figures for folks with less than five years experience and people with 10-20 years developing their practice.
• As two clusters of MyCake users both have an average turnover of <£50,000 … it’s worth noting that MyCake has two distinct groups of users … individual makers of various types who tend to turnover <£100,000 vs. small creative firms with 2-10 employees who turnover £250,00-£2m per annum
• Artists tend to charge a higher hourly or daily rate for their work than designer makers .. there are more artists in the >£50/hr range whereas there are all too many designer-makers in the <£20/hr or worse still <£10/hr range
• Designer-makers tend to have a higher total turnover than artists
• Artists don’t tend to use bank debt or supplier credit ie they use the income they generate but don’t borrow
• Designer-makers on the other hand do use loans
• Whilst Designer-makers may have a higher turnover they are also more likely to make a loss … they are taking more financial risk (borrowing, sale or return, expensive materials) and thus there is a greater impact if they get it wrong.
• None of the artist data we have indicates a loss (though there are times when there ain’t much profit!)
• Very few are making payments into a pension
• Artists tend to pay themselves a higher proportion of the income they generate, Designer-makers less so (due in part to higher costs but also because more designer-makers run a limited company so leave the profit in the company … we suspect that fewer artists have a business bank account and run everything through their personal bank account … if so is a bit harder to leave the profit lying around, is more likely to get spent)
• Both show examples where the income streams have diversified … sub-letting studio space and doing teaching are both fairly common
• Designer-makers tend to spend a higher proportion of their income on the cost of materials than artists do
• Neither spend much on ‘research’ or ‘development’, nor much on training … partly because there’s not a lot of profit to spend on these items … there’s not always much to pay yourself a wage either!
• Designer-makers do spend on marketing, artists less so

What do we learn from this?

Designer-makers

Instinct says that neither group uses their financial information to help them make decisions about their future. We’d love to be wrong on this … please do vehemently & publicly disagree (and tell us how you use such information!). In the main we see designer-makers logging in to MyCake more often than artists so we’d say that they probably have better processes for inputting their data. Even so we don’t think that either artists or designer-makers are using that information for their own benefit, it’s really just a one way feed of data to the tax man. We’d really, really like to help change this!

The profitability issue is one we’d like to look at further. It’s one thing not to make much money from your practice if you’re investing in long term development or if you have an income from elsewhere (after all these are your choices to make) but if you’re trying to grow the business and your patchy cashflow is hiding a profitability problem then there is more here that needs looking at.

We’ve done a few in depth 1:1′s recently and a couple of things have emerged from these that we think are relevant more broadly. If as a maker you led an innovation or a design trend a few years ago but since then it has become fairly mainstream and other designers or even larger production houses have followed suit you may well now struggle to keep pricing competitive unless you’re selling in volume and achieving reductions in the cost of production. If you’re still making the work yourself or producing in small batches (00′s rather than o00′s) then whilst you’re competitors are bringing down prices because they’ve brought down production cost any reductions in wholesale or retail prices are just eating away at your profitability. This is a very real problem and not one you have a great deal of control over unless you can magically increase your sales volume.

That said there are ways to focus attention on a smaller percentage of your overall range so that you raise volumes of sales of key items. Plus if you plan new products differently so that there are fewer items in a range or product then instead of making 6 different plates for a set you’ll have three pairs of two in a set and thus automatically increase the order volumes as it will be spread across three items not six when manufacturing.

Ultimately if you’re making your own work you have two choices

• stay at the forefront of innovation in your sector, stick to small volumes and high prices and complement this with undertaking design commissions for larger manufacturers where you achieve a royalty but they do all the production and selling
• build up  the volume of sales and as you do so outsource production and seek cost efficiencies. This model requires you to focus heavily on sales as you will need a lot of outlets (by which we mean hundreds and with an international spread)

Artists

Looking at the artists who use MyCake most frequently I’d describe them as folks whose main goal is to make a living from the sales of their work as early in their careers as possible. Based on a decade’s experience of working with artists of all types I’d therefore make a clear distinction between this cluster of what I’d call ‘retail’ oriented artists vs. those who are aspiring to be a Turner Prize winner ten years from now. This distinction is important because the latter crowd tend to be judged as ‘selling out’ if their work sells too soon or too easily (there was greater flexibility when the contemporary art market was booming but in tough times it is back to it’s old ways) whereas the ‘retail’ folks are applauded by buyers, peer artists and commercial galleries for being business savvy enough to recognise market forces at work and play to their  strengths. We’re making no comment on the pros and cons of these two career paths but instead just separating them.

The rest of this commentary is therefore focussed on ‘retail’ artists and is aimed to help them make the most of their market.

The good news is that artists don’ t tend to get themselves into debt as a result of their practice and its development. Instead they work with the cash resources they have. The flip side of this coin is that this can be a limiting factor in the growth of sales in so far as the ability to invest in the business is limited by the money you have to hand. This is low risk but potentially low return also. Are there times when you would benefit from producing a catalogue about your work (perhaps with the assistance of a gallery you work with?), would your website benefit from development, would hiring an assistant or someone do to marketing/PR be likely to increase your sales volume or your prices? Might you benefit from hiring a gallery and making sales direct rather than going through an established commercial gallery? The trouble is that if you never have the resources to experiement on a few of these things you will not be able to reap the rewards from them.

If you could make a few more sales would it give you some extra cash to invest in your growth and development?

Over the longer term what are your pension plans??? Make no mistake, you’re no worse off than most creatives but we’re pretty perturbed by the overall lack of pension provision amongst creative entrepreneurs so it is a drum we are going to bang more loudly in the coming months and we’re starting here, we’re starting now!

Final point – we’re already being asked if we’ll analyse other sectors … architects, designers, glass artists, software and games folks, media freelancers, graphic designers etc etc. The answer is we’re planning to. You can help us get to this quicker by advocating that individuals and companies alike start to use MyCake for book-keeping and/or benchmarking of their financial data. If you do your books on other software you can of course just use MyCake for benchmarking.

So, sign up for a two month free trial and put in last years figures!!

Tags: artist, business advisor, business growth, designer, designer-maker, maker, pricing, profitability

A benchmark just for jewellers (2008-9 data)

As we have quite a cluster of jewellers using MyCake we thought we’d do a brief benchmark just for this sector. Here are some of the highlights:

• All the jewellers are sole traders with two thirds making all their own work (the other third subcontract some of their production either to other jewellers or to manufacturers).
• There is quite a variety between those who use a lot of gems vs. those whose work is mainly silver based or made from non-precious items.
• Those who use a lot of gems unsurprisingly show a very high cost of production … up to 73% of turnover is spent on materials … In all honesty we think this is too high because it means that the income for the jeweller is a pretty small percentage of turnover ie a lot of risk for very little return particularly if you’re working on a sale or return basis
• By contrast those using less precious materials may spend as little as 10% of turnover on materials giving a high gross profit … averaging around 80% in this subset. This model offers better profitability i.e. the design value is a higher proportion of the total value of the piece whereas in gem jewellery the design value is smaller and the gem value is what is driving the prices
• Cashflow is very sporadic in both sets as you’re making an outlay on materials that is often not directly connected to the fulfilment of an order (also true for many/most batch production oriented designer makers). Equally your income is lumpy either due to the way orders are placed or because SoR retailers only summarise their sales and make payments monthly or quarterly so there is often quite a delay between a sale by them and payment to you

What does this mean for the way you run your business i.e. what can you do about it?

• The greatest risk of lumpy cashflow is that, particularly in a tough economic climate, you end up making a loss when you look at the year as a whole but it is hard to see at the time due to the up and down cashflow. There are a clutch of designer makers who suffered from this in 2008-9. The good news is that you can offset your losses in one year against profits in another in terms of your tax return. DO THIS!
• Analyse where the money is being held – do a stock take and make sure that you’re not tieing up too much money in stock (raw materials in the studio, finished product in the studio, finished product with SoR retailers). Aim to sell off your excess stock to release some funds and work out which of your SoR retailers are actually worth holding stock with i.e. if they demand a lot of stock but sell little are they worth it?
• If the greater value is in the design rather than the gems (only you can tell this for your business) then consider having a less precious range e.g. silver not gold and aim to make this a steady earner so that the high value gem based work becomes the glittery piece that catches peoples eye but if it’s out of bounds for many then they walk away with a silver something.
• Remember that you see a greater proportion of the sales price in private commissions than in sales through retailers so if you’re gem based then growing your private client base will help improve the profitability of this work. Plus you can make to order rather than speculate on SoR work.
• Be careful with your ‘marketing’ budget … I’ve seen makers who’ve had a bad couple of years borrow against their personal assets e.g. mortgage in order to use the money to pay for trade fair stands. You might do this at a push for one year but the risk here is that you are increasing your debt but putting it into a business that has a reducing ability to pay the debt off. Long term this spells trouble! It is awfully tempting to think that ‘if I could just go to X I’d make enough orders to put me back on track’ … this is getting all to close to the gambler on a losing streak betting larger to bring themselves back to zero! The tough alternative is to cut your cost base and work your way out of tough times by taking the work that you’d shun when all is going swimmingly … for some that’s pieces of teaching, a part time job, less interesting commissions, selling off stock at retail (rather than trade) fairs.

Ultimately you need to keep better track of your finances. MyCake is of course one way to help you do this but software alone is not enough … you need to be looking at your figures on a monthly or quarterly basis, not just looking at your income but at the profitability and the cashflow. This is predicated on the idea that you’re entering data regularly (weekly or monthly) so that you can look at up to date information … so the message here is that the process matters as much as the software. If you’d like a hand looking at your business, your profitability and your cashflow then do drop us a line to marion at mycake dot org. See also our current offer whereby new and renewing users who sign up for an annual payment by the end of Jan are eligible for a free 1:1 session.

Tags: benchmark, designer, designer-maker, jeweller