article by Chris Tomasso
The first thing that you must consider when making a business plan is, “Does the math work?” Many people first get the idea to get into vending because the notion of passive income and working for themselves is so compelling. While this is true, they forget to see if it even makes sense for them first.
Unfortunately, this approach can really hurt you from the start, because, in vending, you don’t see your mistakes for a while. So much money is going from place to place in vending. Income can come from cash from machines, invoices billed, subsidizations, renting machines, rebates from corporations, and more. Expenses can be in the form of paying rent on a warehouse, fixing a truck, fixing machines, buying product, and more. In addition, revenue from the business is built on thousands of small transactions. In general, your profit is not immediately obvious.
It may seem straightforward, but in a business where the average operating profit ratio is just 2%, you can’t afford not to plan. Creating a business plan will show you how much your prices of your product need to be in your machines, how often you can service your machines without worrying about expiring product, how much product to store, how far you can drive to prospect new business, and many other things. It truly does have a trickle down effect.
If you don’t create a business plan, you could be working for less than minimum wage in a job that is supposed to give you more time and freedom.
If you’re having trouble beginning a business plan, one useful exercise is to write a mini business plan for every location you have.
In this exercise you outline what you make in a month/quarter and then subtract the costs that it takes for you to fill the machine at your current service frequency.
Do the following:
This reality needs to be reflected in your business plan. If it takes each of your machines one year to pay off their debt, those machines are not making money for you right now.
How are you making money right now? Do you have this as a side job? Do you offer a service, such as installation or repairing machines for other vendors? Do you have office coffee service where the cost of installation is potentially much cheaper and the per item value potentially much higher?
On the other hand, can you afford to not turn a profit on this machine for the allotted time? Can you afford to add at least 15% to that number to account for maintenance costs? If you can absorb these for the time being, great! If it’s not making you a profit, it still may be a good idea, as long as you plan for it.
If you look at your cash flow with just one machine and you don’t make a profit in the long run, then you need to reassess things like the price you charge your customers for product, where you buy your product, and whether or not you need to make that individual location more valuable to justify the cost to service it. Then you can focus on making your valuable locations worth more and you can know to cut your locations that are not financially viable. This simple exercise will also allow you to be able to easily determine whether or not you should install a machine in the first place.
How do you plan to grow your business? Do you plan on making lots of cold calls? Do you plan on generating a referral based business?
Learning vending is a fantastic way to learn how to run any business. This is because, instead of running one giant entity like a restaurant, you are running dozens or hundreds of tiny machines, each with their own cash flow. In doing this you will get really good at recognizing good business opportunities and bad opportunities because you can automatically do the cash flow in your head.
Like many other businesses, a vending business has an economy of scale. Vending supply companies, such as a cash and carry, sell products in cases, so if you only have one snack machine and you buy a case of chips, unless that company only buys one kind of chips then I guarantee your chips will expire before you sell them all.
Consider this:
A case is 64 chips. In an average snack machine, a row for chips is between 10-12 spaces. This means that you will need 6 rows of one kind of chip to sell in no more than two months, because chips usually expire in two months. You will most likely have expired chips in this scenario. If you are in this situation, then you should probably take away your snack machine until you can find a location with a higher volume of sales. A vending business profits immensely from a certain scale, because you can get and utilize cases to offer a variety, get rebates from manufacturers, begin hiring employees so you’re not doing as much route driving yourself, and get deliveries from vending supply companies instead of going to them to get product. These are just some of the benefits of scaling up your business.
Since scaling is so important, you must decide if you’ve gotten started in the business too small. If this is your problem, you might be better off selling your route to someone with a larger business and working under them on a contract basis. Otherwise, you will have to secure a large loan in order to purchase a lot more equipment if you want your business to scale up quickly. This debt that you’re paying off will then be subtracted from your profits. If you can still make a profit after subtracting all of your business operating costs and paying back the debt for starting the business, then great!
Yet, the difficulty of doing this is why so many small time vendors go out of business so quickly. More and more the little guys are getting squeezed out because the cost of running a business is much harsher for a smaller business as it is for a slightly larger business. This is because often time your fixed costs (rent, insurance, product cost, etc) remain the same whether you have two machines or two hundred machines.
It pays to plan and plan well.