Monday, September 5, 2016

Starting a New Game Store: Break Even Analysis (Part 9)

In part 8 we finished up with our start up assets with professional services.

Our last expense category is start up losses. This is the amount of money you are going to lose on the way to profitability. You will need this cash in reserve before you begin. To calculate the amount of start up cash we'll be throwing on the fire, we'll need to create a break even analysis.

A break even analysis predicts when your sales levels will get you to a point where you'll stop hemorrhaging cash.  How do we know when we'll get there? We make it up! Sales projections and all business plans are just a bunch of made up numbers. Now, this made up number should feel right. It should be backed up by a bunch of factors that bolster your crazy claim of how you'll go from nothing to break even.

The magic number for break even in our model is $19,500 a month in gross sales. You're not going to get there in a small town of 6,000 people. You're not going to get there in a tiny store with no sign. It took me 8 months in the suburbs of the SF Bay Area, looking back at my sales patterns. We're going to look at a couple projections based on 12 and 18 months.

An 18 month break even is conservative, while a 12 month is aggressive but possible. If you own a store, please post how many months it took you to break even in the comments. Pick the 12 month path if you've got retail or game store experience and the 18 if you don't. Note that no sales patterns are as smooth and easy as what I'm presenting. I spent many years dipping below my break even on occasion. It took my perhaps six years before every month was always profitable.

Let's look at the table. The sales level is projected out to when we think we'll break even. Fixed costs are your rent, salary and other. Other is a giant category you'll need to work out, but it should be relatively stable each month. Variable costs are based on your sales multiplied by .6 for your cost of goods.

12 month break even analysis

18 month break even analysis

With an $8,000 difference between an aggressive and conservative break even analysis and a project already in six figures, just go with the conservative value and sleep better at night.  With our start up losses calculated, we now know the seed capital we need to start this business:

So basically, $141K to get this puppy started. Despite what you might be thinking this is not an insane number. There are those who have done it with far less and succeeded and they're exceptional. There are those who have thrown way more at it than this and still failed. The goal here is to have a solid plan that will give you a shot at a real life.

Also, to give you an idea of what an experienced store owner could pull off, here's the lower inventory and start up loss model. An experienced store owner would also likely cut their other costs significantly as well, for example, collecting used furniture, fixture and equipment as they anticipate the opportunity to start a new store. They know what they need.

With anyone and everyone starting a game store, we don't talk about the value inherent in experience. That value starts at around $50K for a new store. You could do worse than find an experienced store owner foolish enough to take on your project for a year.

In the next exciting episode of Starting a New Game Store, we'll look at your Return on Investment (ROI). How are we going to get all this money back? This is another wild ass guess at your sales numbers. We're going to attempt to project how long it takes to get your money back.

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