One of the greatest joys that I’ve had in this industry is helping kitchen and bath dealers secure the proper capitalization for a new business or an additional location. Even in today’s tightening credit market, long-term money is still available to the businessperson who develops a comprehensive plan, proves he can afford the loan, furnishes adequate collateral and makes an effective presentation.
Let’s assume you have an operation that has done just fine during the current economic downturn. You want to open a second showroom location some 40 minutes away in an affluent market not easily tapped by your current operation, timing the launch to catch the coming economic upturn. You’ve been training several employees to staff this satellite showroom. So you’re anxious to get started on an expansion plan.
Develop a Plan
The first step is to develop a comprehensive plan. Most owners underestimate the amount of time it takes to develop a new showroom from scratch, particularly when they also have to manage an existing showroom.
You’d better plan on about nine emotional months of preparation, impatience, anticipation, pain and exuberance. Allow one month each for developing the business plan, securing the financing, locating a suitable space and negotiating the lease, planning the showroom and selecting all of the materials. Allow two months to receive all of the cabinets, appliances, plumbing fixtures, countertops and other finished goods (while simultaneously completing the build-out). Finally, allow one month each to install the displays and clean, decorate, and accessorize the place to a beautiful spit shine.
The planning process begins with creating a Three-Year Operating Budget and Price Formula for the new showroom that anticipates realistic revenue figures as well as strategically anticipates when additional staff and/or subcontractors may be required.
Most owners also underestimate how much of a strain the building of a new showroom puts on an existing operation. For example, if an owner is normally responsible for a $750,000 sales volume, it’s not unusual for that figure to drop precipitously in the year a showroom is built.
Likewise, when a project manager is responsible for producing both a new showroom and an expected $2,000,000 revenue goal for the headquarters location, that goal is rarely attained. And when that happens, cash flow problems result. It’s for this reason that I have recommended the recruitment and training of a second project manager several months in advance of the build-out.
Budget and Cash Flow
The next step is to create a Capitalization Budget, which should include at least three to six months of fixed overhead expenses. Without this additional financing consideration, the entire enterprise could be placed in jeopardy if sales at the new branch location don’t take off as rapidly as planned.
The chart above right shows what the Capitalization Budget for a 1,500-sq.-ft. second showroom might look like.
Once the Capitalization Budget is done, you need to prepare a 12-Month Cash Flow Forecast. The 12-Month Cash Flow Forecast is proof positive that you can afford the loan. Based upon your Operating Budget and the historical percentages of the original location, you must project what each month will generate in the way of new Sales Orders (signed contracts when the 50% deposit is collected), Cabinet Deliveries for Job Starts (when the 40% second payment is collected), and Substantially Completed Projects (when the final 10% is collected). The monthly cash outflows – which include cost of goods sold, overhead and principal/interest on the long-term loan – are subtracted from the cash inflows, showing either a positive or negative figure for each month.
This is a fairly complicated document to prepare with a number of assumptions that need to be footnoted. However, it has been my experience that firms using payment terms of 50/40/10%, as outlined above, can have a break-even budget on $800,000 in revenue and still achieve a positive cash spin-off of $100,000+ in a year’s time – and that’s after accounting for the monthly principal and interest payments, which is what bankers are looking for to approve a loan.