Lena's Friday problem: Lena's bakery is three months old. Besides the shop counter, she now bakes for three cafés and a hotel, and they pay her at the end of each month.
| What | When the money moves |
|---|---|
| Flour | Arrives on Monday, paid for on Friday |
| Her two bakers | Paid on Friday too |
| Rent | Went out on the first |
The loaves are selling. The money for most of them arrives in four weeks. The bills arrive every seven days.
Money moving into and out of a business (cash flow) is a matter of timing. A new business almost always pays out before it is paid. The gap between the two is where new businesses die, and it is the most common reason they close in the first year. Being busy is not the same as having cash.
| Week 1 | Week 2 | Week 3 | Week 4 | |
|---|---|---|---|---|
| Money out | Rent $1,200, flour $300, wages $800 | Flour $300, wages $800 | Flour $300, wages $800 | Flour $300, wages $800 |
| Money in | Counter sales $700 | Counter sales $700 | Counter sales $700 | Counter sales $700, then the cafés and hotel pay $4,000 |
| Cash at the end of the week | $400 (started with $2,000) | $0 | $400 short | $3,200 |
Week three: In week three Lena has nothing in the tin and a flour bill on Friday. The bakery is making money on every loaf, but that money is sitting in four customers' bank accounts until the month ends.
A business that cannot pay this Friday's bill closes, however good the end of the month looks. Being owed money is not the same as having it.
Why does she not simply keep more money in the tin? Because a new business starts with very little. The money to open (start-up capital) came from Lena's savings, and most of it went on the ovens and the first month's rent before a single loaf was sold. A bank could lend her more, but a bank lends on a record of paying money back, and a three-month-old bakery has none. So the loan is small, expensive, or refused.
Three money challenges: Too little to start with. No record to borrow against. Bills that fall due before customers pay.
The third is the one that shuts the door, and it can shut it on a business whose bread is selling well. Lena's savings paid for the ovens; if the bakery closes, the savings close with it.
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Two streets from Lena's shop, a supermarket sells a loaf for $1.20. Across town, Bertorelli's has baked bread for forty years and half the neighbourhood grew up on it.
On the day Lena opens, every person who eats bread already buys it somewhere.
Nobody is waiting for you: A new business does not walk into empty space. Every customer it wants is somebody else's customer today, and moving them means giving them a reason.
The businesses already there (established competitors) have things Lena does not: customers who come back out of habit (customer loyalty), a name people already know (brand awareness) and, if they are big, lower prices.
Loyal customers
- Bertorelli's regulars have bought there every Saturday for years
- Habit is hard to break; a good loaf is not enough on its own
- Lena has to be tried once before she can be chosen twice
Lower prices
- The supermarket buys flour by the lorry-load and pays less per bag
- It can sell a loaf for $1.20 and still cover its costs
- Lena cannot match that price, so she has to sell something the $1.20 loaf is not
A known name
- Customers trust a name they have seen for years
- Nobody has heard of Lena's bakery yet
- Every first customer has to be found, told and persuaded, and that costs money and time
Notice what the three have in common. None of them is about the bread. Lena's loaf may be better than both. The challenge is that being better is invisible until somebody buys, and the first buyers are the hardest to win.
What Lena does about it: She hands out slices outside the school gate at three o'clock, and sells the cafés a sourdough the supermarket does not stock. She is not trying to beat the $1.20 loaf. She is trying to be the reason somebody walks past it.
The cost of that is real: free samples, a sign, a month of Saturday mornings at the market. It all comes out of the same tin as the flour.
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A Tuesday in Lena's first year: In a large business each of these jobs has a department. In a new one, they all have Lena.
| Time | Job |
|---|---|
| Five o'clock | Bake |
| Nine | Serve |
| Eleven | The flour supplier has sent the wrong grade again, so she rings round for another |
| One | Interview a third baker |
| Three | The council's food hygiene form |
| Seven | The accounts |
This is the challenge that sits under all the others. A new business has fewer people, less money and less experience than the businesses it competes with (fewer resources), so the owner does everything, learns everything, and pays for every mistake herself.
The jobs that all land on Lena
Finding suppliers she can rely on
A supermarket has a contract and a buying team. Lena has a phone and no history with anyone. The first supplier who lets her down costs a morning's bread.
Hiring the first staff
Nobody has heard of the bakery, so good bakers do not apply. A wrong hire in a team of three is a third of the workforce.
Rules and paperwork
A food licence, a hygiene inspection, tax returns, and the law on paying and protecting staff (employment law). Each takes an evening to learn and a fine to get wrong.
The hours
Sixty to eighty hours a week is normal in a first year. No paid holiday, no sick pay, and no wage at all in a bad month.
The personal cost: The hours and the risk are not separate from the money. Lena works the hours because she cannot yet afford anyone else to, and she carries the risk because the savings on the line are hers.
A large competitor writes off a bad month. Lena's bad month comes out of her savings.
Set this beside the opportunities in 1.1.5. The independence, the reward and the chance to be first to a gap are real. So are the Tuesday above and the empty tin in week three. New businesses that close usually close on one of these challenges, not on the quality of what they sell.
How this comes up: Short questions tied to a case. Explain two challenges a named business faces, for four marks. Explain one advantage and one disadvantage of being a small business, for four.
State two challenges, for two. Define a term such as cash flow, for two.
The longer questions ask you to weigh the rewards of running the business against its challenges. That is where 1.1.5 and this micro meet.
The four-mark pattern
- Name the first challenge. Cash flow: the bakery pays its bills before its customers pay it.
- Show it in the case. The cafés and hotel pay monthly; flour and wages go out every Friday, so by week three the tin is empty.
- Name the second challenge. Established competitors with loyal customers and lower prices.
- Show it in the case. The supermarket sells a loaf for $1.20 and Bertorelli's has forty years of regulars, so every first customer has to be won away from someone.
The trap: a list with no case: 'Cash flow problems, competition, long hours' is a list. It earns one mark per challenge named and nothing for explaining, because none of it is about this business.
The second mark on each challenge comes from a detail in the case: a number, a name, a date. If the sentence could be about any business, it is not yet an explanation.
Explain two challenges that Lena's Bakery faces in its first year.
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