Most of the entrepreneurs we interviewed in our consulting business have a very unrealistic understanding of what makes investors excited and disappointed. The dream of many inexperienced inventors looking to fund their venture is to build a substantial infrastructure. Your business plan identifies the need for factory space, equipment, personnel, and many other fixed costs.

Investors want to see a plan that maximizes the return on investment. High fixed costs are enemies of a large profit margin. When the business fails, and it always does at some point, fixed-cost assets become liabilities and must be fed continuously, even as revenue declines.

Always present decision makers with the most optimized operations plan possible. Don’t confuse grandiose desires for personnel and equipment with real needs. In today’s business climate, almost every possible service can be rented, leased, subcontracted, or performed by contract manufacturing. A 25,000 square foot factory that is not running at 100% capacity is an underperforming fixed cost asset, especially if a private label manufacturer will provide the service at a competitive price. The cost of rent, energy, insurance maintenance, and facility staff is ongoing and will be a burden to the bottom line.

Investors want to see a lean trade without fat or excess. They will always be open to adding costs as growth and sales traction start to kick in. Initially, the entrepreneur needs to demonstrate that he will be a prudent shepherd of the investment required to get the business off the ground. Here are some areas where fixed costs can be avoided and potential investors can be very impressed.

Facilities

A deal killer is a request for financing that includes money to buy a facility, office, or plant. No startup can accurately determine the rate of growth (or failure) of a new business. Investors will want to see a plan that reflects realistic goals and space requirements. This almost always means renting facilities until the need calls for the purchase of facilities.

Manufacturing

There are almost no good reasons for a startup to make its own product. Possibly, if there is a very valuable trade secret involved, but not often even then. All contract manufacturing must include a Non-Disclosure Agreement (NDA) as part of the negotiations. Contract manufacturing is available and used in almost every industry today. Estee Lauder makes almost none of the many cosmetic or fragrance products it markets. Liz Claiborne and Calvin Klein do not make any of their clothes. Ikea sells only furniture made in third world facilities.

All of these companies, and many more, realized long ago that manufacturing was best left to factories located where labor, raw materials, and government regulations were not stifling. These companies concentrate their assets in research and development, design, sales and marketing. The same should be done by every entrepreneur looking to succeed in obtaining investment.

Dirty

Every entrepreneur should be able to aggressively market and sell their product. However, no single person or small association can be in front of all the customers who will potentially be interested in buying the product on sale. The investor will want to know that there is a selling strategy that offers an excellent chance of success.

On the sales floor, there are industry-specific sales representatives: manufacturer representatives and agencies available to sell an interesting, market-ready product, on commission, within your industry. Commissions are usually standardized within each industry. The gift industry is 15%. Food products are 3% and higher, depending on the volume a product can reasonably be projected to achieve. Industrial products are from 2% to 5%. Historical profit margins dictate commission rates.

By using sales agents, the entrepreneur must manage the sales force as if they were salaried employees. Weekly calls to review goals, promotions and upcoming meetings. Write letters and emails highlighting the successful accomplishments of other agents. I have used commission sales agents for many years and recommend them to most of my clients.

I make as many key account sales calls as possible with my sales agents. If it is my product, I want to control the big presentations, although I will pay a commission on the sale that I have mainly generated. I attend as many sales meetings as possible. The more I can meet, learn, and learn about the activities of my sales teams, the better I can motivate, train, and energize them.

When commission sales agents don’t sell a product, they don’t get paid. This obviously minimizes fixed costs. However, you will want to pay as much commission as possible. Healthy commission checks mean a very healthy sales base.

When I was very young Vidal Sassoon Hair Care Products National Sales Manager, I faced a problem. Our sales had skyrocketed. The growth was so rapid and the market acceptance of the Vidal Sassoon brand so overwhelming that our commission payments also accelerated to the point where my senior management became upset when commissions exceeded their own salaries. “Those guys don’t work for us? Why do they earn more than the owners?” they asked.

I faced a difficult situation. I offered two options: reduce commissions or fire commissioners and hire a company-employed sales force. I figured if I could get a sales hedge of 8% of cost of sales (including salaries, benefits, travel, etc.), it would make sense to transition. Lowering the commission rate would displease agents and I didn’t want to risk losing the excellent momentum we had built.

Very surreptitiously and quietly, I interviewed and hired a team of key regional sales managers and we quickly executed a conversion plan that senior management had signed off on. Vidal Sassoon was at a point in his business development where a company-owned direct sales force was needed and justified. However, it was a concern as we were greatly increasing our fixed overhead.

Entrepreneurs should manically focus on sales growth. Sales is the number 1 job in every company, especially a new company! Be very careful to build a sales hedge that supports your projected growth without choking cash flow with a very high cost of sales.

Marketing

It is hoped that the entrepreneur, or a member of the management team, will have experience in marketing. If not, the answer is often to hire a consultant. An experienced consultant will save time, money and mistakes. Make sure the consultant you are considering has current industry-specific experience, strong references, and a transparent track record of success.

Compliance

I never recommend that a new company handle their own logistics (warehousing, pick and pack, shipping, billing, etc.). Dealing with the shipping, handling, conditions and terms required to satisfy retailers is daunting. Big box stores like Kroger, Lowes, and Wal-Mart have extremely complicated inventory control systems. Special and very expensive software is needed to communicate and expedite the receipt of goods.

On average, I can have my inventory stocked, packed, and shipped for about 4% of my sales price (depending on volume). If business is seasonal or slows down, I don’t have to pay high fixed costs, just a percentage of the total shipping invoice amount. If business is booming, my contract fulfillment warehouse increases hiring. A good contract warehouse offers a full menu of services that I can choose from as needed. Your systems will be sophisticated enough to handle the most demanding buyer of my product.

The first time you read a business plan you usually have a strong reaction, positive or negative, to the document as a whole. A negative result generally occurs when the Executive Summary contains references to high fixed costs. A positive verdict is more likely when the entrepreneur indicates in every possible way that he is only interested in maximizing profits and return on investment, not building a colossal infrastructure that will bleed the company dry if everything does not proceed perfectly and the assumptions are not comply.