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Why Many Small Businesses in Shopping Centres Fail

Di tulis oleh Encik Anif 03 July 2006

Posted by: Ko-Lyn Nga Post(s) by this blogger

Have you ever come across a store in a shopping centre that hardly have any walk-in customers but yet is able to maintain its operations for years? Makes you wonder how that store could survive without much sales and especially with the extremely high rental rates in shopping centres.

There are mainly three reasons for this.

The first being that the store is part of a bigger group of companies who are operating the store to maintain its product image. So, even if the store is making a loss, the presence of the store maintains a continual advertising front for the other companies or stores in the same company group.

The second is what most observers will claim, that the store to be a “money-laundering” outlet for illegal money. Money gained from “illegal” activities are channelled into these loss-making stores and comes out as “clean” store sales money. However, these claims are often not proven and so questions on money-laundering activities often remain unanswered.

The third reason is most likely the main reason why a store will be doomed for closure after awhile – bad accounting. Most small businesses are run by sole-proprietor owners who are probably doing it for the first time. The ailing economy will probably drive more into running their own business if they are unable to secure a decent employment job. Starting with a limited capital, most of these store owners will probably have a decent idea on what to do with their money – buy stocks, sell stocks, pay expenses and treat the rest as profits. This is where the danger lies.

Most sole proprietors fail to take into account the unsellable stocks which becomes dead stocks after a certain period of time. This is especially true where perishable goods ( food stuff ) or fashionable goods ( clothings and jewellries ) are concerned. Assuming a store receives a 50% discount margin when it purchases its stocks from the manufacturers or distributors. So for example, if yearly stock purchases amounts to RM 300,000 and half of the stock purchased were sold, yearly retail sales would amount to RM 300,000 with RM 150,000 worth of stocks remaining. So gross profit would be RM 150,000 and lets say operating expenses comes out to be RM 100,000 so net profit will be RM 50,000 .

So, if the owner has say RM 400,000 start up capital, he would now have a balance RM 100,000 capital money, RM 50,000 in cash from net profits and RM 150,000 in closing stocks. In the following year, he uses the cash of RM 150,000 to purchase more stocks for his store, which now has a total RM 300,000 in stocks. So if half of the stocks were sold again, this would result in a yearly retail sales of RM 300,000 with RM 150,000 worth of stocks remaining. So gross profit would again be RM 150,000 and with an operating expenses of RM 100,000 for a net profit of another RM 50,000.

So one might be forgiven to think that this store is doing pretty well. However, the figures start changing from the third year onwards in the same given example. After using up all the capital money, the store now has RM 50,000 from net profits to buy stocks ( without borrowing from the bank ) so, with that purchase, total stocks would now amount to only RM 200,000. Assuming half the stocks were sold again, this would result in a reduced yearly sales of RM 200,000 with RM 100,000 worth of stocks remaining. So gross profit would only be RM 100,000 with an operating expenses of RM 100,000 – so no net profit this time around. And the figures actually go into red if dead stocks which are no longer commercially sellable are taken into account.

So to all those who wants to venture into a business of their own or to those who have already started, especially in shopping centres, its time to check those business figures of yours again before it’s too late. Write off the “dead” stocks from your accounts and you’ll know if you’re actually making a loss instead of profit.

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