Saturday, August 27, 2016

Starting a New Game Store: Expenses (Part 3)

Now that we've determined your salary in part two, the next step in building your successful game store is determining your expenses. Right here I'm going to tell you I can't figure out your expenses. The type of store you want, the scope of the store and your location are going to mean your expenses are wildly variable.

Figuring out your expenses, however, is the bulk of the heavy lifting in figuring out your business plan. Sales, as we'll learn, is a wild ass guess. Expenses? You can nail those down with research and your success will have a lot to do with that work. I do really well with sales projections, but I failed miserably in figuring out the expenses of my first location. Not enough research.

What we can do with expenses is generalize. We generally know the ratios of expenses for most game stores. Also, since we want you to have a substantial income from your business. We're going to assume you follow these ratio guidelines. Yes, you can have your store in a low rent area in a tiny community, but you won't hit your income projections. So take these generalizations with a grain of salt. Figure out your own expenses projections so you can plug them into the discussion.

We're going to use something called the Three Bucket Method. This is used in restaurants and it's generally true with retail. It basically says that after Cost of Goods, your expenses will fall into three buckets: labor, rent and other. Nobody has perfectly sized buckets, and during the life of your business, your bucket sizes will change. But generally, after COGS, figure generally equal sized buckets. It looks something like this:

Again, you can cut this pie in a variety of ways, but the kernel of reality in this chart is your salary. Everything else flows from that number. So lets look at each category:

Cost of Goods is what you paid for your games, plus shrinkage and credit card fees. This is a high number, with room to improve. As you get better at this and your volume increases, your cost of goods percentage will improve. This is good, because you can shift some of that money to labor for some time off (I recommend starting by bringing them in one day a week). My cost of goods is about 4% better than when it was at its peak. That's a lot of money!

Labor is your salary of $31,200 for the first year. Get your COGS down to 57% and you've saved enough money to pay for that one day a week off person. Employee 002. If I was your investor, I would insist you make this your goal.

Rent: Hey, if my salary is $31,200 and rent is about equal to labor, doesn't that mean I'm spending $2,600 a month on rent?  Bingo! It's a model, but that's not an unreasonable amount of rent.  It's going to wildly depend on your location, but you generally get the idea. Here's how $2,600 a month in rent looks based on your monthly rental rate:

My first store was 950 square feet. My current store is about to be 4,300 square feet when we complete our mezzanine construction.  Going below 1,500 square feet is pretty rough.

Other is a pretty broad category.  It includes a bewildering number of expenses. I recommend researching this and crowd sourcing from as many store owners as possible. When looking at a location, talk to nearby tenants to better understand what's covered in rent and what's not and how your landlord handles common area maintenance.

I went two years in my current location using my neighbors dumpsters. It was included in CAM charges in my last location. Not this one. They were awfully patient to let me get away with it for so long. That's a $360/month expense I hadn't calculated.

Here are my expenses from my first full year in business in 2005, adjusted for inflation (which gets us close to our percentages):

Any one of these expenses could be a lengthy conversation, but lets save that for another time.

The big reveal in this post is we can now calculate your cost of goods, which will effect your inventory value and your initial investment. Our COGS over the course of one year in our fancy model is $140,560.  How much inventory do we need then?  It's extremely complicated. We'll talk about inventory requirements in Part 4.

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