It’s the collateral costs that will blindside your business
When we started Lashbrook Lassis, we diligently went over our costings and tried to envisage every possible financial scenario. Based on these projections, we decided how much we needed to charge for our drinks and what would be left over to either re-invest or, perish the thought, to pay ourselves a salary.
On paper, the sums didn’t look amazing but they were good enough to think we had a chance. We also looked around at other drinks on the supermarket shelves and thought, “well, if they can make money then surely we can”. This, we later realised, was a very dangerous mindset to have.
While the essential ingredients for our product were relatively inexpensive, the problem was all the surrounding costs. These were so great, they not only reduced our margins but actually meant we started losing money.
To break it down, our costs went a little like this. The ingredients themselves were about 50p per bottle and we were looking to sell our drinks for about £2.50; so from this point of view it’s amazing we didn’t succeed. Yet things started to get squeezed as the list of costs grew longer and longer. Firstly, we needed a vessel for our ingredients and our bottle and caps cost 13p. Then the label, which cost 20p. Then the “secondary packaging”, which were the boxes we used to put 6 lassis in at a time were about 8p.
So while we now had a product, the costs had crept up to 91p. This was almost an increase of 100%, but we were focusing on the £2.50 retail price and thought it was still possible.
I would describe the above as the “primary costs”; those things related to the actual product or service you sell. Yet, these are never going to be the biggest costs in your business. We soon realised the list of secondary costs were significantly more than the actual product itself. There were the manufacturing costs for each batch (28p per bottle), there was the delivery costs of our ingredients (£70) and the refrigerated delivery cost for the drinks from our manufactures (£165), which added the cost of £1.22 to each drink. This meant our lassis were now £2.12 per bottle. And this didn’t even include the monthly rental costs for our office and storage space, which used to be £1,350 until we started storing them in my parents’ garage! And none of this included one of the most important aspects of any business, generating an actual salary. I don’t think for the 4 years Jo and I ran Lashbrook Lassis, we ever paid ourselves anything.
Therefore, when creating your financial projections, start with the secondary costs and work your way backwards to the primary ones. As it’s here where the money is really spent and is frequently brushed over by businesses at their peril.