How can a consignment shop go BANKRUPT?
October 1, 2007 by Auntie Kate
That’s what one of our Sharers wanted to know the other day. It’s a common misconception. Those looking at the business from the outside in, think They get all their stock for free so what’s the big deal about starting a consignment shop?
Yes, it totally possible for a consignment shop to go bankrupt. Sometimes they
seem to go belly-up overnight. Even donation-only not-for-profit thrift shops can fail. And the rate of failure for buy-outright (BOR) resale shops is astronomical.
So before you decide you want to start a consignment shop, open a resale shop, or even organize a thrift for your favorite charity, read this. Even if you are successful in this resale business, read this, because there is nothing that harms the reputation of the industry as a shop going out of business…especially those who do so without honoring their debts to their consignors!
The most common stumbling blocks I see in resalers going out of business:
* Not budgeting enough for opening expenses. Utility deposits, the high cost of signage, on and on… if a new shopkeeper uses up her financial cushion before she opens, there’s no cushion… which is the second most-common barrier to success:
* Not having, really HAVING ready to use, at least six months’ worth of business and personal expenses set aside. There is nothing so heart-breaking to me as the knowledge that JUST as Sally Shopkeeper is hitting her rhythm, say about month 4, that she starts panicking because income isn’t covering outgo just yet. She starts doing ill-advised things, and soon, the business she put her heart and soul into is kaput. Had she had that set-aside money, she wouldn’t have made bad choices. Which relates to third most common blunder:
* Using OPM as her own. Now, in business, using OPM (other people’s money) is considered a virtue: it means people are INVESTING in your success (and you get to use YOUR money for the above-mentioned cushion!). But alas and alack, spending consignors’ money that is owed them is a GIANT no-no. And it happens way too often. Take the advice in the manaul and HEED it: a separate account for money owed consignors. Ditto, if you are buy-outright, for your open-to-buy dollars. Without the money to pay suppliers, you don’t get more supply, and you know where THAT leads!
* And finally, the last stumbling block to success in resale: Realizing that there’s a whole category of expenses involved in being self-employed that you plum didn’t think about. Lost of income from your last job. Child care. Loss of benefits such as health insurance. Added vehicle costs (hey, it costs money to go to OfficeMax every other day!) Daily food costs (coffee, lunch, and often dinner at the shop.) Added food costs for your family (”I’m too tired to cook; let’s go out.”) Then there are the “I deserve it because I work so hard” purchases to pamper/reward yourself. And finally, believe it or not, there is a stumbling block in all the GREAT things that come into your shop…that YOU buy. One shopkeeper told me she totaled her year’s purchases of things for herself, and it was over $1500. She was so bummed that I didn’t have the heart to mention that not only had she spent $1500, but she’d ALSO missed out on $1500 worth of profit, had she sold those things to customers. So it REALLY cost her $3000.
* Oh, one more stumbling block to success? Trying to make it alone. Reinventing the wheel. Doing things the way the past owner did (even though you BOUGHT her business because you could see areas that needed improvement) or the way you “dreamt up.” Don’t try to make it alone. Don’t try to figure out through trial and error things which are readily available at our Products for the Professional Resaler. No one has enough money, time, and effort to make mistakes in today’s financial situation. To risk a $10,000 to $200,000 investment in starting a business for lack of a few hundred dollars’ worth of how-to info i, well, kinda silly, huh?
Kate,
Its excellent!
and very very good reminder to lots…
There ARE lots of expenses to owning/operating a retail outlet…and sometimes those expenses are simply not considered as ‘real’ …………..just stock for some reason….
Kate,
Thanks. I will admit that I am the sharer who voiced that opinion. But you are right. There are A LOT of reasons why a shop could go bankrupt and I’m glad you pointed some of them out. I just hope that with word of mouth, GREAT support, a CUSHION, a GREAT attitude and a LOVE for the business will help mine to grow and keep growing until we burst at the seams! I really appreciate all the help and advice I get from your site and I in no way was trying to offend anyone with my comment.
Thanks,
Nancy
Silly Sprouts CC Shoppe
I guess my main problem is when shops mix money. For the life of me I cannot understand this. The money you owe consignors is NOT the shops money. I would just die if I used the consignor money and then had to beg borrow and steal to make it up cringing each time the soor opened. I believe that too many places get to big too fast and in over their heads trying to keep up. Start slow and bulid again and again.
We are in this biz a little over a year and honestly we learn something new each day that changes the way we do business.
It is business but it is the BEST business ever!
[...] We’ve already talked about how easy it is to go bankrupt. [...]
Great5 tips! What I’m trying to figure out is how much revenue is reasonable to expect. I am developing a business plan for a non-profit shop to benefit a charity. I can generally estimate the expensed, but I have no idea how to guess at the income potential. Does anybody have any suggestions?