Boo.com has spent $125 million in 18 months and was yet to make sales. At launch their whole business model collapsed because the site needed broadband which at the time was only available to a few people. Sales were so poor and complaints were mounting and in the year 2000 the company went bust. The name and some of part of its systems sold for $250,000!
Ambition is good yet every ambition has to be tempered with some element of patient endurance. Growing, learning; then growing and learning, fixing the problems and growing and learning. When anyone; either artists, labels or other music businesses try to circumvent this simple method they most of the time end in the liquidators office.
So how do you know your music business is growing too fast, or that you are beginning to bite off more than you can chew?
Unable to pay running costs - When any business is incapable of paying the small bills like telephone, gas, electricity they are probably in a dangerous zone especially if the business is embarking on an expansion programme of some sort. When a company is growing and expanding well they are well positioned to meet their day to day expenses but the ones without a good growth plan will struggle.Little or no cashflow- Where is all the money going!? Money/cash is the life blood of any business and we must always have a reserve of about 20 - 30 per cent of the profits if the business is to survive a lean period. If an unexpected event takes place in the business cycle i.e. a distributor goes bust owing money; that could cause a rapidly expanding business to go bust too. However with cash in reserve it becomes easier to ride a business storm.
Poor level of sales in comparison to expansion/activities- Expansion has to be funded by money. It could either be borrowed money of money that has been saved over a long period. Whatever the method a business decides to pursue, sales become even more important during an expansion period because increase sales will affect the cashflow of the business. So when a music business is financing a new product or service it is essential that they keep their eyes on the need to increase the level of sales to match the planned growth.
High gearing- Any business that borrows too much is simply asking for trouble in future because borrowing is and will always be the most expensive type of debt. The finance of a company which has 1/3 of its finance as debt can still survive as opposed to the one who has about 70-80% of its finance on debt. Here is the ultimate question about borrowing -"When the financers call for their money can you pay up without putting the business in danger!?"
Accepting orders you cannot meet or are unable to say no to- At a particular staging of one's business there are certain types of suppliers or service providers you cannot afford to deal with. For example, if you are just starting a label you may not be in a position to trade with a major distributor who may ask you to supply a minimum of 2000 - 10,000 CD's. If you do supply them it means you will need to wait to get paid and waiting affects the cashflow which affects the business.
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