‘Big Lemonade’

(I’m afraid this is a bit ‘long-winded’ but I have tried to keep it simple so that even someone with no business experience might understand.)

     Let’s say you have a 10 year old daughter. Let’s call her…uhm…Malisa. Malisa decides she wants to open a lemonade stand. She may give all of the profits to the needy, if she chooses. She may donate 10% to a church, if she chooses. She may keep it all and save up for something she really wants, if she chooses.

It doesn’t matter what she does with her profits. You have decided that it will be her choice.

     So Malisa does a lot of phone calling and internet searching and finally has her figures together which show that lemons, sugar, and plastic cups will cost her $.80 per cup of lemonade, which is fine because she wants to keep the price at $1.00 per cup. That should, once she’s up and rolling, give her a ‘mark-up’ of approximately 20%…not unreasonable…considering the time that she will spend. (Malisa is going to be subsidized by her parents for the water and the ice that will go into her final product)… Malisa decides, since she lives in a nice neighborhood, that she will build a nice stand. She is going to ask for a loan of $20 from her parents to be repaid out of her income, at no interest.

     She is convinced, from watching and keeping track of her neighborhood traffic, that she can sell 50 cups of lemonade per day, so she also has to take an initial loan for $40 per day from the grocer, just to keep the cups full. Fifty cups per day will provide her with a net income of $10 per day, after expenses.

     Everything is good, it’s up and running and for the first week, Malisa does indeed sell an average of 50 cups per day. (She hates it on those days when she doesn’t because, as she pours the leftovers out, or drinks it herself, she can see the costs and profits not being met, but then on other days, everything is going as planned and sometimes better.) At the end of the first 5-day week she has grossed $250. She pays back her grocery loans of $200 and sets $40 aside to start the next week’s business with her own money. She now has $10 of which she sets aside $1 to go towards her ‘building loan’. The rest, $9, she puts in her piggy bank…her ‘profits’.

     Every morning for the first 3 weeks, Malisa makes her way, early, to the market to get her supplies for the day. Finally, the grocer says, “Honey, if you would buy this big bag of lemons and the larger bag of sugar, and a case of cups, you would have enough for the whole week, AND it would cost you 10% less.

     The second week’s grocery loan was only $160 because she had paid the first day ‘up front’. The third week’s loan, following this same practice was $120. Malisa realizes that in 3 more weeks, she will be able to pay for a full week’s worth of supplies up front, at the ‘bulk’ rate. Not only will she net more per week in profit, but those early morning, everyday trips could become a weekly hike, and she will be able to pay back her ‘building loan’ ahead of time.

     She feels good. She makes good lemonade and quite a few of her customers come by every day for their lemonade ‘fix’. They have come to depend on not only a refreshing drink, but also a warm smile.

     Occasionally, several of her ‘regulars’ will leave a little extra tip. Malisa decides, early on, that this ‘windfall’ will automatically go to her neighborhood animal shelter, because she loves dogs so much and can’t stand to think that one might go hungry or be sick and need medicine. These tips she never even counts as her own.

     Sometime in the 5th week of business, a large Labrador retriever, out on its daily walk with his owner, bumps into Malisa’s stand and spills an entire pitcher of lemonade. Though it was disappointing, she realized that her piggy bank would be not only 10 cups, $2, short this week, but also she would need to cover that lost pitcher from her savings.. Oh well…these things happen!

     Finally, on the 6th week of operation, Malisa goes to the grocer with $180 and purchases the supplies to get her through an entire week. She now has $43 in her piggy bank, no debt to the grocer, and has put aside $5 to pay back her parents.. The 6th week goes wonderfully. She has even picked up 10 more sales for the week.

     Just to keep us up to date on her ‘books’, on the 6th week Malisa takes in $260. She sets aside $200 for the next week’s supplies which is 20% more than she has been investing. (With new customers and prospects she feels that she should be prepared for more than her original 50 customers per day), leaving $60 of which she uses $15 to go ahead and pay off her building loan. She now can deposit $45 in her piggy bank, greatly expanding what she put in the piggy bank during the first 5 weeks, and she has managed to give the animal shelter $8.50 from her tip jar.

     “At this rate”, Malisa thinks, “I will not only be able to buy some boots for my friend, who has none, for the upcoming Winter, but I will also have enough money to buy those warm gloves that I have been wanting.”

     Week 7… All is well. Loans are paid off, supplies are paid for in advance with cash. Savings are growing. Dogs are being fed!   After this week, there is over $100 in the piggy bank.

And then…Uh oh…Week 8…Groceries were paid for, but a storm system moves in. The stand can’t hold up under the wind and rain and even if it did, there is no one on the streets wanting lemonade. 2 days with no business! The lemons aren’t suitable for the next week, but the sugar is okay and so are the cups, so it’s not a total loss…just a set-back…dip into the piggy bank for next week’s supplies.

     Week 9—The sun is back out, with a vengeance. Maybe Malisa can make up for the two lost days. She has cups left over, and sugar, so this week was not as tough at the grocery store… Got 10 or 12 new customers so that helps cover for the ones she didn’t have last week.

     Back on track, sorta…but now the grocer says that because last week’s storm was a big one, the price of lemons and sugar and cups has gone up 20%. So what should she do? She can raise her prices accordingly, or she can try to maintain what her customers are accustomed to, and hope the price of goods goes back down and just not make any profits for a while.

     Now she hears on the news that the price is not likely to go down soon, not only because of the storm, but also because the shipping costs have gone up, due to rising oil prices. She didn’t know there was oil in lemonade…!!!

     The books…Week 9

(I know…this is getting boring, but we’re almost there…!!!)

    $260 taken in. $220 spent for next week on supplies due to rising costs. $80 to cover for the loss from the storm…removed $40 from the piggy bank… …$4 in tips for the animal shelter. .she raises her price to $1.25 due to the rise in her costs.

And so on….it’s still fun, she feels as if she is accomplishing something and people like her and her lemonade.

     But then, one day a man in a black suit buys a cup of lemonade. He enjoys it but asks, “Is the sales tax figured into your price?”, and, “Do you have a business permit and a business license?..do you have an inspection from the Health department?…you may also be subject to a fine for operating a business on a public sidewalk. How much profit are you making?  20%?  Why that’s obscene! Do you think everyone who walks by can afford $1 for your lemonade? What are you doing for them?”  He goes on and on with regulations and laws and fines and guilt, and then adds up everything that she is going to have to do..

     The final figures bring Malisa’s cost of operating a lemonade stand up to $2.20 per cup. What can she do? She either has to lower her profit margin yet still charge $2.50 per cup, which she knows will cause her customers to go away, or simply go out of business.

     Now she comes to you and says, “Dad, I’m afraid that my lemonade stand is going to start costing ME money to run . What should I do?”

So, what would you tell her, Mr. President?

And here’s a link to a past post

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~ by rkpowers on April 12, 2012.

One Response to “‘Big Lemonade’”

  1. Exactly!

    Like

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