Entreprenuership : Wanna start ur own business -Wait Read this..

During a general chat last week one of my friend (Colleague ) told me that he is frustrated with the daily routine of the jobs and would like to start a business of their own. Have heard this familiar ruse for umpteen number of friends and relatives over the last 10 years. But I guess people have not really thought of the what are the risks and sacrifices one has to make to start some business of your own.

Let me share with you an analysis which I made with one of my friends on starting a small restaurant (size of a small Dharsini ). The idea of the analysis was to analyze how easy/ difficult it is to set up a business at a later stage.
Hope this example analysis will sensitize the readers on the costs/ risk/sacrifices one has to make to take up the route of Entrepreneurship. The intention of the article is not to scare you, but to sensitize you to the risk involved in setting up your own business by giving up your cushy jobs. One of the reasons why am writing this is that of my relative took up a business venture without realizing the costs involved in it and is now facing big losses. So let’s get sensitized to the costs/risks involved.

Note: All Data used here is actual data collected 2 years back and are not assumptions
Dharsini in Malleswaram :

The intention was to start a Dharsini for my friend (small quick service restaurant )in Malleswaram Area keeping in mind the daily traffic around 8th Cross – 12 th Cross Malleswaram. The intention was to offer things which are not normally available in a dharsini along with the regular fare at Dharsini

Cost of Real Estate: Upon an extensive survey we hit upon a really good place in 10th Cross Malleswaram. This place was available for a rent of  36k/ month with 11-month advance and was right on the main road.

Cost of Setup for Cooking & Serving: Once the real estate is taken we need around 2 months before we can start offering food. During this time we need to work on the interiors, cooking setup for this place. This costs on an average of 3 lakhs for a small dharsini.

Cost Of Employees: On discussing and visiting an existing hotel of a close friend of my dad realized that to run a small scale dharshini we need to have 5 full-time employees with + 1 head cook.  On an average, a head cook would charge around 8-9k / month and the 5 employees need to be paid 4k + accommodation. Even after this, it is difficult to retain people with employee turnover being highest at the lower levels. Apart from this, we need to provide accommodation for the employees which costs around 5k/ month.  So the total costs of employees is  9k+ 20k+ 5k = 34k
Monthly Costs: Apart from the cost of employees you need to factor other costs like GAS, Electricity, Mamul to Food Inspectors and the daily cost of rations to cooking food.  This on an average comes to  15k/ month.

All the analysis is fine, but the most important aspect is that you don’t make profits from the day you start your business. This is the fact where people who are starting off on their own make the biggest mistakes. They stretch themselves up to start the business, but no business is profitable from day one because it needs to achieve a critical mass before the fixed costs of operations are supplemented by profits from selling goods.   On visiting and discussing with existing owners of hotels/ dharsini we realized that on an average it takes  5 to 6 months for regular visitors to start coming to a joint and the critical mass of only reached after 18 months (optimistic assuming that u are serving the best food fare).

To make an analysis of costs involved we assumed that during 12 months we will not be able to break-even (i.e start earning enough profits from the sale of food to recover fixed costs like rent, salary). Let’s now see the overall costs involved.

Upfront Investment ~ 7.5 lakhs :

  1. 4 lakhs for Advance of Rental
  2. 3 lakhs for Interiors & Cooking setup
  3. BBMP License, Cooking Gas, Electricity connection – 50k

Running Costs Till Break Even period ~ 10.8 lakhs:

  1. Salary Costs –  34k * 12 Months ~  4 lakhs
  2. Rental Costs –  36 *14 months   ~  5 lakhs( 2 months to set up place)
  3. Monthly Expenses – 15*12 months ~ 1.8 lakhs

Thus we need to have around 19 lakhs of capital to start a small dharsini of your own.

Now to give an idea of the number of customers who have to visit your restaurant to make it profitable assuming 1 single customer spends Rs 25 in your restaurant and that your gross profits on this are around 15 Rs (i.e you spend 10 rupees to serve an item which costs 25 Rs). You need to recover Fixed costs of Salary + Rental from the profits we need to serve 4700 customers ~ 160 customers/day.  If you imagine this is quite a lot of customers to serve on a daily basis, so you break even only at this point.
But wait… what we are missing something!.
All this does not include your costs, BECAUSE you cannot continue to work with your cushy job while trying to start a business on your own. ADVICE which I got from several restaurant owners is that this sort of business cannot be made successful without fulltime involvement of the owner because trusting others with the management of a business is suicidal. So you need to quit your cushy job (would have done anyway right ? remember you are frustrated with ur corporate routine). Now here comes the most difficult part of the equation which needs to be solved. The moment you decide to quit it means that your monthly bank balance will no longer receive that nice salary cheque of xx thousand monthly. But starting a business does not mean you starve right? So u need to keep money aside for your daily expenses which we can safely assume is at-least 30k (remember kids education, house rent, EMIs. Could be higher if u have the burden of a big house EMI).

So you need to keep aside money for the same. Assuming an optimist view that business will break even in 12 months and you spend 2 months in setting it up and keeping a good buffer for another 12 months to cover up ur costs we are looking at 26 months * 30k of expense ~ 8 lakhs. So start you need to have a corpus of  19 lakhs + 8 lakhs.

Surprised!  -> BTW I am talking about a small dharshini only here. You may extrapolate this example to any other business which you wanted to get into.  The basic idea of this article is to sensitize one that we are all enjoying the benefit of assured salary every month and it is easy to forget about that one. As they say, the grass is greener on the other side, but it is not always so as the grass on another side may have many more thorns that one can imagine from here.

So the next time you make a loose statement that this 9 TO 5 Job is frustrating I want to start some business of mine, keep in mind costs involved

ps: This is the article written in 2011. My blog has since been backed and now am restarting this blog at a new destination.

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