Wednesday, December 07, 2005

Crushing Cars for Fun & Profit

I have been getting to know a new business over the past few days. I am working with a client whose business involves the crushing and recycling of automobiles. I call it “Crushing Old Cars for Fun and Profit.” The business is a great example of a solid business model. Here’s how it works…

The company’s employees go to junkyards where they crush junk cars and load them onto trailers. The trailers are then picked up by subcontracted truckers who ship the crushed cars to another company that buys the cars and in turn recycles them.

Here’s why this is such a great business model:

1. Good supply—cars turn into junk every day through accidents and old age. Junkyards need to move cars out to make room for more.

2. Difficulty of entry into the business—crushing cars involves expensive machinery and good capitalization so it isn’t a market that attracts a high level of competitors.

3. Transportation is readily available due to good supply of hungry truckers.

4. Hungry end market—the high cost of steel makes recycling attractive.

5. Here’s the best part from the point of view of This Old Accountant—The goods are shipped from the junkyard to the end recycler who cuts a check the same week for all the loads delivered. Only then do the junkyards and truckers get paid. No paying suppliers and then waiting for the customer to pay. Brilliant!

6. This is exactly the kind of business that banks love to loan money to. It provides jobs all along the way—from the junkyards to the employees who crush to the truckers to the recycler to the companies buying the recycled cars to the retail stores who sell the products made from recycled goods. And all along the way it brings economic value to every community involved.

Of course, there are some downsides to this business model:

1. Use of machines that can crush cars is viewed as dangerous to employees so workers comp rates are high. Plus, the potential danger of attack by junkyard dogs.

2. Machinery needs constant tending and repairing.

3. Need for a certain type of employee—mechanical, able to work with no supervision, good work ethic, able to work outside regardless of weather extremes.

4. Debt is a necessity for getting into the business.

If you are looking for ways to improve your own business model, here are some areas for you to investigate:

1. Competition. Who is your competition? How many competitors do you have? Which ones are strong, which are weak? How difficult is it for more competitors to enter your industry?

2. Suppliers. How difficult is it for you to get the goods you need to do what you do? For a maker of physical products this includes the raw materials needed. For a professional, your supplies include your time, education, and all those ideas rattling around in your brain.

3. Finances. How and when do you get paid for what you do? How does that affect your cash flow and your ability to stay in business?

4. Accentuate the Positive, Eliminate the Negative. What are the downsides of your business model? What can you do to work within the confines of those downsides and still make money? What can you do to minimize the affect of those downsides or even capitalize on them?

5. Add Value. What value do you bring to the market place? What is the elemental problem your product or service solves? How can you capitalize on that value? How can you express that value to your customers in such a way that your competitors retire from the field?

Investigating the pieces of your business model or dissecting what works in someone else’s business is a great way to begin improving your business. Once you pinpoint what works you can look for ways to capitalize on the strengths already in your business. When you pinpoint the weaknesses you can after them like a junkyard dog after a pant leg.

Until next time,

Caroline Jordan
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