Monday, August 29, 2016

Starting a New Game Store: Inventory (Part 4)

We discussed expenses for your new game store in part 3, coming up with a very general overview of what you'll be spending. Now lets look at the gross sales you need to fit this model:

Using our cost of goods number, we'll work backwards to find we need $234,267 a year in gross sales to hit our cost of goods sold number in our model. That's pretty strong sales, but not impossible. It's close to what I grossed in my first year of business. This is still a theoretical number for the moment, the real meat and potatoes is when we want to figure out how much inventory we need to hit this number. How much inventory do you need?

You want as much inventory as you can possibly get. However, I'm going to add another consideration to this model, ROI. ROI or Return on Investment is what keeps this discussion rational. It's how we'll measure success going forward. There's an old joke about running a game store. How do you start a million dollar game store? Start with 10 million dollars. We want to make sure we don't over invest. Even if you do have the money, spending too much, blowing your ROI, is just foolish.

There is a reasonable amount of time and an unreasonable amount of time to get your money back from this investment. Most game stores that even manage to get their money back are unreasonable, but we're going to assume we're reasonable people. We'll get back to this later when we calculate all your expenses, but basically a 3-5 year ROI is reasonable. 3 years is what I would want to see from a professional endeavor. 

We'll say 5 years is reasonable because you may be lacking experience and need more time to ramp up. What I mean by ROI is not the standard investment definition, but the amount of time to get all your investment back through profit.  Can we do it in 5 years with the model we've created? I have no idea. I'm making this up as I go. I'm pretty confident though.

Forgetting ROI for a moment, we're going to work with turn rates to show how your inventory performance will hit our sales goal. We'll work backwards, assuming that your experience level will result in certain performance levels which will inform how much inventory we need to bring in over the first year.

We're working with the $140,560 cost of goods number here, dividing it by the turn rate you expect starting out. Your turn rate is your inventory performance or how many times you can turn it over (sell through it) in a year. This assumes you're building a long lasting, broad spectrum game store, rather than a Magic clubhouse. You can skip a couple levels if you're running a Magic shop, but it will be a brittle enterprise that won't stand the test of time and likely won't get you to your goal of a mid-50's salary.

What this basically says is the more experienced you are in this endeavor, the less money you'll need to make the same amount of money. Something we never talk about in the game trade is this: experience is valuable. An experienced store owner can start up a store quickly, hit the ground running, dial in inventory, have an understanding of product from day one and they'll be able to sufficiently promote it with events and advertising. An experienced owned can do the same job with $42,168 less inventory. It also means they'll hit their ROI number much sooner than an inexperienced owner and will need less startup capital.

So with no experience, you're going to need a lot more startup capital, with that $70,280 number being just your inventory requirement. The good news is this investment won't go to waste. If you survive, you'll learn the trade and that bigger investment will go to work for you. In fact, we're counting on it to get you to strong profitability and your target salary. 

This is all a WAG (Wild Assed Guess), PFA numbers (Pulled From Ass). This is as good as you're going to get at this stage. Business plans are waggy PFA based documents that are all about the thinking and research and have little bearing on reality. This is the area you will dwell in for the first couple of years starting your business. Wondering if your WAG is right. If your PFA numbers are accurate. This is your first gut check. 

If you're still with me, the next question: Do you have the starting inventory dollars needed? If not, consider gaining more experience. Even if you do, you'll need far more than just inventory to get started. We'll look at the rest of the expenses, checked against a reasonable ROI, in Part 5. 

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