It has been in my mind to write about this specific topic for awhile. I have been mentioning it to several people... (even to Uber drivers when they ask), and I think I have a good grasp of the idea now to explain my thought.
The summary is this:
The summary is this:
- There is two simple way to see & start businesses:
- One is capital intensive business
- and the other is Service Intensive business
- The Capital Intensive business requires to have capital to create sales. You need capital constantly to stay in business.
- The Service Intensive business require to have one-time capital and then do the service constantly with the same capital to create sales.
If I had to do it again, I will choose to create a Service Intensive business from the beginning for myself. Of course, being the crazy person (my close friends call me crazy-loco), I chose to start the Capital Intensive business from the beginning.
Probably I will not have thought about this without the experience I got during these years. The information came to me when I read the book of Peter Drucker's (the father of Management as a science) Entrepreneurship & Innovation which review a good insight about service companies that I was not aware.
The author mentioned that entrepreneurs would focus mostly on fashionable (cool) and new industries during their time. For example, on the 40's, 60's maybe the car industry and/or machinery was in fashion, on the 90s was computers, on the 2000's the internet biz and apps, etc. The problem according to the author is that from the vast wave of new entrepreneurs in the new business, very few made it big. Most did not succeed and probably yielded low incomes. What is the important to notice, is that on the 40's, 60s, 90s, and 2000s the simple service businesses across the decades have been always offering good margins and maintain a very profitable income thru the years.
What is not cool, what is not new, what is not trending, have been providing decade behind decade good yields and being a true tested business. We are talking about hair saloons, accounting services, cleaning services, house-improvement services, plumbing, nursing homes, hospitals, gyms and exercise services, restaurants, trash service, education services, pet related service, moving services, legal services, etc.
Here it is an example to understand what I am trying to mention. Let's say I want to start a business and I have $30,000 dlls.
Choosing a Capital Intensive business, let's assume you buy and wholesale shampoo. Your sales margin would be 10% aproximate, customer will pay in 30 days, and, to make it simple, no expenses. In this scenario, if you want to earn $3,000 dlls, you need to buy and sell $30,000 dlls.
Choosing a Service Intensive business, you have $30,000 dlls to invest, let's say, in a hair-cut saloon. With the investment you buy supplies, scissors, chairs, dryers, towels, and get your beginning fixed cost paid. Let's assume that will set-you up to start receiving customers immediately. Just having one employee, or being auto-employee, you will be getting a net profit $3,000 dlls per month working one shift per day. Probably shift are 8 hours.
Now, the interesting question, what would you need to do to earn $6,000 dlls instead of $3,000 dlls in both businesses?
In the Capital Intensive, with all the same assumptions, you will need to get another $30,000 dlls in capital to buy inventory and sell at 10% margin for 30 days. Either to same customer or to new customers. So, your business requires more capital to earn more.
In the Service Intensive business, that means that you need to develop more services. So, you will need to either work two shift per day (8 hours more) or you will need another employee that will receive more customers during the same shift. Notice that working another shift during the day, or that employing another person, will not required the same amount of capital as the beginning investment to create the extra income.
This is the point and the learning I develop from thinking about Capital Intensive Business versus Service Intensive Business. On Capital Intensive business as an owner I do not see daily cash, or my profits every month. Each new earning, it is invested automatically in the business because the natural growth of the company requires more capital to catch up with the sales. Thus, as an owner of my own Capital Intensive business, I only retrieve from my company a salary and the notion of the growth of the company. If I take dividends (earn cash), I will be impeding the growth. More capital is a requirement for the growth to Capital Intensive business.
In the other hand, if I owned a Service Intensive business, after each month of paying the fixed cost, as an owner I can take the dividends of the earnings. If I take the dividends, this will not affect the performance of the sales of the company the following month. Thus, as an owner I enjoy immediately cash from this investment.
It is crossing my mind that in the Capital Intensive business, we can argue that 10% margin is too little, and that its possible to get extended credit from vendors and quicker payments from clients. That would be a great fix to increase inflow of cash flow and grow sales with the same amount of capital. But in my experience, even capital intensive business require a lot of service, and the competition is very fierce. You are an intermediary, and your customer will be reselling your merchandise and you need to offer low pricing to turn around fast your products.
To put it as well in my mom's words; she used to own a service intensive business before, and she always felt to have cash in hand. Later, she moved to capital intensive business and in that fashion, maybe from bad management, she felt to be owing month to month bills because she depended from a salary. Her capital intensive business was always growing.
If you are looking for an advice, then I think the best scenario is to start with Service Intensive businesses... maybe have couple of those and then used the extra cash flow to start pumping into one business in Capital. In my opinion, Capital Intensive businesses will give you better margins and profits in the long run (again, long run investment) to create the wealth and financial strength of companies. Those are the big players game, and you can get there with time and with cash.
As March 2016, I declare myself to start looking for a Service Intensive business. I want to start seeing cash. Maybe I did not start badly, but I can tell you that it is very difficult to start a Capital Intensive business when you really do not have any capital. It is possible, because we did it.
Finishing this article now - Eduardo Guayo Kouri from Jetset Foods
