Of all the problems of a launching business; explosive sales hardly seems like one of them. Who ever heard of an entrepreneur complain that sales were too great? Particularly for a newly launched business, higher than expected sales can feel like a boon. Your customers like your product, they’re buying and rebuying. All good, right?
Higher than expected sales can throw a monkey wrench into the best laid [business] plan. Let’s take for example, Commonwealth Tea Company (not their real name). They attended one of my workshops and were struggling with the issues of growing too quickly.
Perhaps the most obvious challenge with higher than expected sales is the production issue. Do you have the capacity to produce more? For a farmer, overselling (or over committing to wholesale accounts) means that you might not have product for all your customers. For the tea company, will they be able to manufacture as much tea as they need? Do they have the production space and the employees? Do they have the inventory of teas and packaging?
Higher than expected sales can also lead to cash flow issues. It’s counterintuitive; after all, more sales means more cash. And more profits to pay overhead and other expenses. But the timing of the cash flow can pose a critical threat to a business that’s unprepared.
Like most food based businesses, whether it’s a restaurant, farm, or food producer, there are many upfront costs before any sales are made. The tea company purchases tea leaves and packaging, they hire employees to blend and brew. They have a marketing team drawing up sales sheets and advertisements. The sales team is calling the distributors and retailers about carrying their product. A farmers buys seeds, preps soil, weeds and harvests. A food producer – someone who’s making bottled tea or hot sauces – not only are you not paid upfront, but you may not be paid for 30-60 days after your customers have received their orders. (side note: A farmer that sells produce through a CSA program can minimize some of these issues by receiving payment upfront for any costs incurred).
Before you receive payment from your customers, you need to pay your suppliers, employees, landlord and utilities. Sure, it will all work out when your customers pay you, and you’ve completed a full sales cycle. But do you have the cash resources to float the business until you get paid?
Let’s take for example, the tea company. Let’s say, they receive an order for $100,000 worth of bottled tea; and the customer expects to pay 45 days after they receive the product (a large order like this often comes from a large retailer that has this kind of leverage). Before they can celebrate the big sale, they’ve got to produce and pay for production.
To process the order, they need to:
- Buy tea (10% of revenue – $10,000)
- Buy bottles and labels (3% of revenue – $3,000)
- Rent kitchen space (25 hours at $40/hour – $1,000)
- Pay employees to produce and bottle the tea (25 hours at $25/hour – $625)
- Pay the sales rep a commission. (3% – $,3000)
In total, the business owner needs $17,625 up front.
When the business owners get paid, all will be fine…. But they need a 60 float on the cash to make the product.
How do you finance growth?
Have a plan.
Creating a business plan with financial projections helps a business plan out cash flow and see where the tight times will come. Especially in the first year of business, it’s important to project cash by month, taking into consideration the schedule by which your customers will pay you, and when you need to pay your vendors.
If you notice that you have a tight spot on cash, you can plan for it in several ways.
- Change your sales and payment assumptions and see if there’s a point where you can self-finance your growth.
- Get an operating line of capital.
When you find a formula that allows you to grow your business without getting into a cash crisis, make note of it. As you continue in your business, look back at your projections to make sure you’re on track.