Blog

12
Oct

Saddled with huge advertising costs, startup needs to find a path to profit

It was while working as a freelance designer and helping clients rebrand that Dawson Whitfield came up with the idea for his Toronto-based technology design company, Logojoy Inc.

“At the end of the day, I was a glorified font-picker,” Mr. Whitfield says. “I felt like there has to be a better solution that takes the best things about working with a designer and the best things about doing it yourself.”

Logojoy uses an artificial intelligence-powered online platform to help small businesses design and generate logos without the need to partner with a human graphic designer.

Story continues below advertisement

The company launched in November of 2016 with an unofficial $25,000 line of credit from Mr. Whitfield’s parents, and has since been growing by about 30 per cent month-over-month.

“When I launched, I only had enough money for next month’s rent, which was pretty scary,” says Mr. Whitfield.

Logojoy credits its success to Google AdWords, which brings in customers who are searching for “logo maker” and other terms online. The company also advertises on Facebook.

At first, it spent $100 a day on online ads, and during this past summer it was spending about $2,000 a day, which has helped increase revenue to about $230,000 a month. (All numbers are as of Aug. 1.) The company is losing money, however, as its costs are about $252,000 a month.

Logojoy’s top three monthly expenses include ads at $114,000; wages for its 18 employees (and counting), $86,000; and rental of its downtown Toronto office space, $15,000.

The company has no debt and about $795,000 in assets, which includes about $648,000 in cash from more than $750,000 it raised from angel investors in the United States and Canada. “The nice thing about raising that money is that we are able to use it as a buffer so we can always operate at about break even,” says Mr. Whitfield, who is the chief executive officer. He co-founded the company with Rares Crisan, its chief technology officer.

Logojoy wants to continue to grow so it can scale up, but it’s tricky, given how uncertain future revenue is. “It’s especially hard for us because our revenue is not recurring, and we don’t have any historical data to help us prepare for the future,” such as a potential seasonal drop in sales, Mr. Whitfield says.

Story continues below advertisement

Story continues below advertisement

Another challenge is figuring out how much money to keep in the bank. “I’ve heard you should keep three months of expenses, but that seems like a lot to me,” says Mr. Whitfield. “We currently have about three months’ worth, but I would feel guilty about keeping that much money in the bank and not spending it.”

Mr. Whitfield also wants to increase margins so that, for every $1 spent on drawing customers, they get back $3. Today, they make about $2.50.

The company can stop hiring and become profitable this fall, Mr. Whitfield said, “but we want to continue to grow our team aggressively to make sure we stay ahead in the market.”

At the same time, they want to invest in the best tools for employees, and offer perks to attract and retain talent. “We’re at the point now where it’s so incredibly important to bring on the best of the best,” he says.

They’re also wondering whether it’s best to hire more full-time workers or use contractors instead for certain roles.

We asked Gabrielle Loren, a chartered professional accountant and partner for business development at the B.C.-based accounting firm Loren Nancke Co., to address the company’s concerns and provide advice.

Story continues below advertisement

Expert advice

Ms. Loren isn’t concerned that the firm is losing money, given that it’s less than a year old.

“For a normal small business, it can take about a year for them to see a profit. If they break even in their first year, it’s yee-haw,” she says. “The focus right now for them should be on bringing sales up, keeping costs down and finding that break-even point – and then getting to a point where they become profitable.”

While Logojoy’s sales are growing, Ms. Loren says they should prepare for them to slow in the years ahead. “You want to be on the pessimistic side with your revenue and exaggerate your expenses. It’s not that you’re setting yourself up for failure, but if you’re putting a reasonable number there … you create more of a cushion.”

Should Logojoy hire more people? Ms. Loren encourages the company to take it slow to ensure they bring on the right people. Hiring the wrong employee can be costly in the long run. “It might take longer to find the right person, but that’s the way to go,” she says. She also recommends using a recruiter, where necessary. It may cost money, but it can save time the owners could otherwise spend building the business.

Ms. Loren also cautions about hiring contractors who, depending on how long the contract is for and who else they are working for, could be considered employees by the Canada Revenue Agency.

As for seasonal sales trends, Ms. Loren doesn’t see Logojoy as a seasonal business. “They won’t be impacted by snow or good weather, either.”

As for cash flow and leaving three months’ worth in the bank, she says the company needs to focus on breaking even first since the money they have isn’t technically theirs. The three-month rule usually applies when companies are generating a profit. “They have more than $700,000 in the bank, but it’s not their money … it belongs to investors,” she says. “When they generate their own profits, then yes, they should keep three months’ worth of expenses aside.”

Paying for growth

Logojoy’s revenue has increased rapidly, but it has been fuelled by costly advertising

Assets
Cash – $648,201
Equipment – $95,205
Supplies – $18,730
Accounts receivable – $32,109
Total assets – $794,245

Total liabilities – $0

Sales revenue (monthly) – $229,638

Expenses (monthly)
Wages – $86,310
Rent – $15,140
Supplies – $12,039
Utilities – $540
Advertising – $114,087
Other – $23,901
Total expenses – $252,017

Net income (profit) – -22,379

Article source: https://www.theglobeandmail.com/report-on-business/small-business/sales-before-profit-for-now/article36545205/?cmpid=rss1

About admin

Comments are closed.