A Growing Sprout

Xiaoning Wang often ran into people in her Brooklyn (N.Y.) neighborhood who had adopted Chinese children and wanted to teach them about their heritage. So in 1999, she launched New York-based ChinaSprout, which sells Chinese-themed books, clothes, and other products online and in catalogs. The $2 million, seven-employee company recently inked a deal to provide Asian-language books to New York City public schools. "China is in," she says. "I really want to be the No. 1 supplier of Chinese educational and cultural products in the U.S."

THE GOAL: Ramp Up Growth

GAME PLAN: To help Wang lay the groundwork for expansion, BusinessWeek SmallBiz turned to Robert Friedbauer, a CPA in Teaneck, N.J., and Lewis Altfest, president of L.J. Altfest & Co., an investment advisory firm in New York.

Both experts commend Wang for building a profitable company in a short time. In its fiscal year ending May 31, ChinaSprout's $2 million in revenues produced a net income of $33,500, with gross margins of 51%. The company has $155,925 in cash and no long-term debt. "This is a very sound company," says Friedbauer.

But before ChinaSprout can grow, Wang must untangle her operations. She has to get a better handle on inventory and prepare for the likelihood of having to relocate when her lease expires in 2008.

Wang now spends a huge amount of time managing inventory. ChinaSprout stocks approximately 5,000 items, but only about 1,000 generate 75% of sales, says Friedbauer. He suggests that Wang substantially cut back her stockkeeping units (SKUs). Next, she might consider outsourcing customer fulfillment and distribution so she can put more hours into marketing. Friedbauer suggests Wang look into "pick-and-pack operations," distribution centers responsible for stocking items and filling customer orders. He advises Wang to ask her printer for referrals or contact a trade association to get names of catalog companies that use them. Another op-tion, suggests Altfest: bringing in a partner with the operational knowhow to manage inventory and distribution.

Outsourcing will also mean Wang can rent a smaller space if she has to move. ChinaSprout leases 6,000 square feet at the bargain rate of $105,369 a year, about $17.50 a square foot. With Manhattan market rates now about $40 a square foot for space comparable to hers, rental costs could soar to $250,000—enough to drive Wang out of business. She is not ready to buy her own space. But if she decides to keep her warehousing operations in-house, she may need to move to a less expensive area.

Once her operations are in order, Wang can focus on growth. Friedbauer advises her to develop a formal expansion plan, including projections for sales, hiring, and other costs. That will help her nail down how much financing she really needs. The experts agree that ChinaSprout's profitability should allow it to grow without investors. Says Altfest: "I would rather see her do it with the company's own profits and some judicious use of debt." In addition to her cash flow and savings, Wang has a $200,000 line of credit at a local bank. Friedbauer suggests she start tapping into it—not only for the money but also to demonstrate her business' creditworthiness. Having a good banking relationship in place will help her if she has to take on long-term debt to finance a move.

Wang agrees she needs help managing operations. "It's my headache," she says. "I'd really like to delegate those responsibilities." Rather than bringing in a partner, she says she will consider hiring an operations manager. She'll also investigate outsourcing, though she worries about both the costs and maintaining quality. "We control that now," she notes. Her biggest surprise: how good a real estate deal she has. "I will have to consider moving out of Manhattan," she says. That may be a small price to pay for helping ChinaSprout blossom.

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By Virginia Munger Kahn

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