When contemplating a new business, many inexperienced entrepreneurs think they need bricks and mortar investments like offices, factories and farms. Focusing on production instead of sales is the biggest mistake many new start-ups make.
Typically, when members of the general public first meet us, they automatically assumed we had a big investment in physical infrastructure. “Oh, you’re in the wine business,” they would say. “How many acres of vineyards do you have?” We didn’t have any.
Why? Because once we clearly understood what our real business was, we realized we had neither the time nor capital for vineyards. Our real business was sales and distribution management. Vineyards would have demanded costly holding and maintenance every month, even if there were no sales!
Yet, this is a familiar trap that many start-ups fall into. They simply don’t have the revenue to support their infrastructure. To avoid this, we recommend that start-ups outsource as much as they can, especially in the beginning when they are still trying to understand the “real” business they are in.
We drastically underestimated the cost of sales, in both time and money. With any start-up, it takes a while to develop dependable repeat sales. During that time many go out of business because they have giant monthly expenses that are required to support an infrastructure.
In most businesses there are many suppliers of goods and services with excess capacity, or that are in the business of producing products and services for other companies. Even though outsourcing can save a new brand, there are three essential functions that we believe should not be outsourced:
Quality Control. Why be under financial pressure to put a mediocre branded product on the market just because you have invested heavily in the infrastructure to produce it? Write a contract with a producer who doesn’t get paid unless the product they produce for you meets your specified standards. Then demand that your quality control person be present on the days when they run your job.
Accounting. You can outsource tax preparation and financial planning, but you should have your own in-house cost accountant. They can provide you with cash-flow driven strategies specific to your business and necessary for expansion. They can create a “dashboard” and “box score” that will provide the visibility you need to make decisions in time to avoid disaster. We put our CFO on our board and tied his bonus to sales, profitability and growth. He was incentivized to discover and implement the kind of growth we could afford. When our salesperson got a last minute appointment with “Mr. Big,” our accountant stayed up all night producing the reports required to close the sale!
Sales. No one is going to sell your brand like you can. Brokers tend to carry many brands and can survive quite well without yours. So can distributers and retailers. If you don’t have your own people in the marketplace, you can fall victim to “stories” about your slow sales, usually followed by a request to lower your price and send more advertising materials. Hire your own salespeople and discover the real roadblocks to sales and empower them to remove those obstacles, often by doing the other guy’s job! You may find, as we did, that sales were slow because the customer’s access to your product was blocked by a rack of potato chips!
So, yes, outsource as much as possible, write forever tighter contracts by plugging the loopholes, and focus on sales. But keep the essentials (quality control, accounting, and sales) in house.