Finding Her Focus
Erica Anenberg was an art school student with a talent for design when she started making tiny glass gift boxes and sterling silver jewelry three years ago. Her creations were favorites with her friends and relatives, who liked them so much they started asking her if she would make more so they could give them as gifts.
Since then Anenberg has started her own company, which has grown so fast that it has nearly overwhelmed the 24-year-old entrepreneur.
Anenberg moved the company, E-Glass Inc., from a spare room in her parents’ home to a facility in Van Nuys and hired three full-time employees. Last year E-Glass had $180,000 in sales and this year has the potential to more than double that. Anenberg’s artsy, Gen-X-focused collection has found a niche in stores including Neiman Marcus, Nordstrom, Macy’s and Bloomingdale’s.
But while her company was taking off, Anenberg found herself not only designing the products, but also acting as bookkeeper, graphic designer, production supervisor, receptionist, gofer and production manager.
“I am the sole owner and find myself feeling extremely overwhelmed at times,” she wrote in her request for a Small Business Make-Over. “Everything seems to be working in a whirlpool kind of way. I’m afraid if I disrupt it, my production will be affected.”
Consultant Paul Ratoff stepped in to evaluate E-Glass. His first reaction was to give a thumbs-up to Anenberg’s product line, which he called attractive and unique.
“Erica is very bright; she has a lot of energy and a good eye for design,” Ratoff said. “If she stays in that niche, develops that line and gets known for that, she can develop a very nice business.”
In the meantime, though, Anenberg has made many of the missteps that plague start-up companies, especially those that have early success.
The most fundamental problem Ratoff noted was that E-Glass’ product line is primarily oriented toward the gift ware market--whose retailers are boutiques and card stores that sell such items year-round. But Anenberg’s two sales representatives sell primarily to apparel stores that offer a smattering of gifts and jewelry to augment their clothing sales.
Ratoff’s first recommendation was that E-Glass move from being an apparel sundries company to a gift ware company. Although E-Glass has been quite successful in introducing its product line to large department stores, that strategy will prove difficult to sustain.
“These stores change their fashion items four to six times a year, following the apparel cycle,” Ratoff said. “In order to keep their customers interested, they also change the gift items on a seasonal basis. So glass accessories may be in one season and out the next.”
Gift ware stores, on the other hand, change their offerings much less frequently, and suppliers such as E-Glass needn’t constantly come up with costly new designs.
Ratoff also suggested that E-Glass narrow its product selection. Its catalog offers nearly 50 boxes in 50 types of glass, as well as 15 varieties of accessories. That much diversity is unnecessary.
“If Erica concentrates on selling to smaller stores that are going to buy one or two items from her, they would rather purchase from a narrow selection of products that makes it easier for them to decide what to order,” he said.
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Anenberg took Ratoff’s main business recommendations to heart, explaining that she really got into the apparel market by chance.
“I tried for six months and went through four reps trying to break into the gift ware market. Either they weren’t getting it, or I just wasn’t doing it well.
“Finally, I concentrated more on my jewelry and took it to the California Mart and they were like, ‘What else do you have?’ and it just clicked.”
She understood Ratoff’s point, however, about the longevity of her designs and said she will make a renewed effort to push more solidly into the gift ware market.
“I definitely plan to cut down my line and do something with my catalog to make it easier for the gift rep,” she said.
Another of Ratoff’s recommendations was for the company to add a minimum of five gift ware reps to cover Los Angeles, New York, Chicago, Dallas and Atlanta over the next year. He cautioned Anenberg not to add more than one new rep a month until she obtains new financing.
Ratoff then moved from E-Glass’ product line and sales to her financial statements, which have been prepared on a cash basis and must be recast on an accrual basis.
“She’s been reporting income based on when she received the funds and reporting expenses based on when the checks cleared her bank,” Ratoff explained. “That process kind of distorts the picture. She actually was a lot more profitable than she thought, because she’s got receivables which are not being reflected in her financial statements.”
Anenberg’s financial statements should report her sales when she ships her products and record expenses when she buys or receives a product or service.
“That way her statements will be more reflective of what her business is actually doing,” and they will be in compliance with tax requirements for a manufacturing company like E-Glass, Ratoff said.
Anenberg’s father has agreed to come on board as her bookkeeper and, with the help of her tax accountant, he will recast her financial statements for the last year on an accrual basis.
“The company will probably show a small profit or break-even for last year and a nice little profit for the first quarter of this year,” Ratoff said.
Based on that performance, Ratoff said, E-Glass should be able to get financing at a reasonable cost. “The company should look into [a Small Business Administration]-guaranteed loan or line of credit of $50,000 to $100,000, secured by the assets of the business,” he said.
Anenberg needs to straighten up her books and prepare a business plan and a 12-month projection before she can begin her search for funding, Ratoff said.
To start the company, Anenberg used $4,000 given to her by her father, and she later borrowed $50,000 from a bank against a certificate of deposit belonging to her grandmother. When she landed a $60,000 order from Bloomingdale’s and found she did not have enough working capital to fill the order, she turned to her credit cards, borrowing nearly $25,000 at interest rates of 18% to 20%.
“She’s got to repay those credit cards, and if she’s late it affects her credit, and a bad credit report will affect her ability to get conventional financing from a bank,” Ratoff said.
Anenberg also has used factoring, which means she borrowed money to get advance funds on a single order. Factors are not uncommon in the apparel and gift ware industries.
Factors buy receivables from a business owner at a discount, say 1.5%, Ratoff explained. Then the customer is billed and instructed to pay the factor. When the factor collects the money, it pays the company, less its discount.
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Factors sometimes also advance money against receivables, charging both interest on the funds that are borrowed and commission for collecting the receivables.
When an entrepreneur uses a factor on an order-by-order basis, he or she may wind up paying as much as 10%, with interest and fees, to get the cash. Those kinds of rates are difficult for small-business owners, Ratoff said.
“She might get an order for $50,000, but she’d have to spend $5,000 to get the cash upfront. That’s mind-boggling for a small business, and they would have to have pretty good margins to survive it,” Ratoff said.
That’s another reason Ratoff recommended that Anenberg concentrate on the gift ware market, which is more likely to give her small but consistent orders year-round.
“It is very difficult for a small company to build its business on large orders. It’s much better to develop a broad-based customer list than to have one or two large customers who can control your company by driving you out of business if they return your product or don’t pay for it.”
In reviewing Anenberg’s cost sheets, Ratoff came up with some recommendations to improve her production.
The numbers showed that E-Glass’ cost of labor was being underestimated by up to 100% when the company was producing a single item or very small quantities. And her labor cost figures did not take into account the fact that Anenberg spends 45% of her time supervising and preparing production of the intricate designs.
Although total labor costs for the first quarter of 1998 amounted to $8,700, if Anenberg’s time was factored in, an additional $6,000 in overhead--or 70% of labor cost--would have to be added, Ratoff said. If indirect labor costs were added to the manufacturing cost, E-Glass’ margins would be less than 40%.
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In order to avoid having small orders eat up her profit margins, Ratoff suggested that Anenberg increase the size of her work orders, so that instead of producing one item at a time, she produces a minimum of 10 of a kind.
As for Anenberg herself, Ratoff said, her goal should be to concentrate on her strengths in design, marketing and sales. She spends 40% of her time in those areas. Ratoff said she should try to spend 80% of her time there.
“She’s got to be out there to find out what’s important for her company and to create it,” he said. But he cautioned that she should not hire additional help immediately.
The company should plan on taking 90 days to get its books in order and then work on getting financing, getting a couple of new sales reps on board and start planning its 1999 catalog, Ratoff said.
“With the changes that are needed, Erica can’t begin soon enough,” Ratoff said. “This company can probably do $400,000 this year and $1 million next year and could grow substantially from that point on to where I could see them up to $5 million within three years. That number could conceivably double every year for a couple years if Erica can build a good organization under her and run it properly.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Company Make-Over
* Name: E-Glass Inc.
* Headquarters: Van Nuys
* Type of business: Designs and manufactures glass boxes and jewelry
* Status: Private corporation
* Owner: Erica Anenberg
* Founded: May 1995
* Start-up financing: $4,000 cash gift from her father
* 1997 sales: $180,000
* Employees: 3
* Customers/clients: Department stores, mail-order catalogs
Main Business Problem
Disorganization, lack of cash flow and priorities
Goals
Increase sales, become better organized, free owner’s time to design and market product lines
Recommendations
* Move the company from an apparel/sundries focus to a gift ware concentration by hiring new sales representatives and narrowing product selection.
* Add a minimum of five gift ware sales reps in the next 12 months.
* Continue to use current catalog for 1998, but more limited offerings to boutique customers with $100 minimum order.
* Review and adjust labor costs upward and re-cost products accordingly to achieve minimum margins of 55% on all gift ware items.
* Recast financial statements on an accrual basis and purchase Quick-Books accounting system. Prepare 12-month projection and business plan and apply for bank financing, possibly a Small Business Administration-guaranteed loan of $50,000 to $100,000 secured by business assets. Do not reduce credit card debt until bank financing is in place.
* Once financing is secured, hire an assistant at $24,000 annual salary who can handle customer service, production scheduling and purchasing, shipping, invoicing and light bookkeeping. Invest $10,000 in six sample lines for new gift ware rep force. Use balance of funds as working capital.
MEET THE CONSULTANT
Paul Ratoff, a business consultant for the last 22 years, is a financial and management consultant at Los Angeles-based Moss Adams, one of the 15 largest U.S. accounting and consulting firms. Before his career as a consultant, Ratoff was vice president and chief financial officer at Hadron, a laser-equipment manufacturer in Southern California.
