For product businesses, cash flow is incredibly important, and is much harder to manage than for service-based businesses.
With the need to outlay a significant amount of money on purchasing stock, carefully managing your cash flow is absolutely vital for your business’ survival.
This blog post examines five factors that can really damage your cash flow, so if you struggle with this area, read on.
1. Buying too much upfront
The quickest way to damage your cash flow is to commit to too much stock before you know if something will sell. Make sure that the demand matches the supply; being in a position where you need to order more stock is more manageable than dead stock.
Some suppliers or manufacturers will require you to order a minimum amount; be wary of getting caught in the trap of ordering more stock to meet those minimum order quantities and then end up with more than you can sell.
Buy products on a trial basis. Wherever possible, buy less volume until you have proof it will sell. Starting off slowly is a necessary means to ensure long term success.
2. Buying too much for your sales
Most product owners find that a huge percentage of their profits ends up locked away in dead stock. Dead stock is stock that you have invested in but are not selling.
While you may want to feel more secure having stock to sell, are you aware of what the right amount is? Take time to assess what sells before taking a risk in investing in products without credible sales history.
Once you are aware of what the demand is, what works and what doesn’t, create a more precise plan. This means setting clear stock budgets and targets. If these are based off a realistic plan, they will help ensure that you have enough stock without eating up too much of your profits.
When you have a budget and targets, you can see how well you are doing based on how well you stay within budget and on target. Having a plan also forces you to be really clear about whether or not you are on target – and if you have a rule that you can’t bring in more stock until you are back below target, it will avoid stock piling up in your business.
3. Taking on too many costs in your business
It is easy to have costs creep up on you. Adding a few things here and there seems harmless at first but adds up very quickly to become a budgeting issue if not dealt with properly. How often do you review what is really necessary? There’s probably a few things that you could get rid of which would help alleviate spending costs.
In order to avoid those creeping costs, take notice of what is happening. For every cost that is added in, be very clear on how many products you need to sell to generate the profit needed to cover that cost. Review if that goal is realistic and attainable. Is it worth it?
Once you have dealt with the extra costs, and set realistic goals, you can start looking at where you can cut back. Cancel all the subscriptions you do not use, for example. Really think about what the absolute essentials are, keeping your overheads to a minimum gives you more flexibility.
4. Not having clear targets
Unclear targets are perhaps the most easily avoidable causes of damaged cash flow. Not knowing how much stock you should have, or what your planned sales are, make it very difficult, if not impossible, to effectively manage your cash flow. Budgeting is vital, and without goals, setting budgets cannot be done, as you do not have a clear set of priorities for what needs to be allocated and when.
Ideally, you want to map out your cash flow carefully, but this requires you to be clear on how much you are going to sell, and how much stock you will be buying in. Once you know what it is you want to achieve and how to properly manage it, only then can you know how to do that effectively.
Trying to manage your finances, without these clear guidelines, will only make managing your cash flow that much more demanding.
5. Not making enough on each sale
Even if you are selling well, if you are not making enough money on each sale after all expenses (including your time, if you make the products yourself) then you will struggle enormously with your cash flow.
The higher your margin percentage (the percentage of the product price that is profit), the easier your cash flow will be.
If you are buying products from another brand, you should be achieving around 50% margin, if you are manufacturing/making products yourself, you should be achieving around a 60% margin or even higher, especially if you want to wholesale.
When was the last time that you checked exactly how much you are making on every sale?
Make sure that you are not under-pricing your products, and that your prices reflect what your product is worth, the market that you are in and what your customers are prepared to pay.
Any work that you do to improve your profit margin on your products will pay huge dividends in terms of managing your cash flow.
Being aware of these five factors is a great first step to taking control and improving your cash flow.
Catherine Erdly has over 20 years experience working with product businesses of all sizes from high street names (such as Paperchase, Laura Ashley, and Coast), to some of the most exciting new independent businesses. She helps product businesses grow their sales, manage their stock, and build lasting businesses through 1-2-1 mentoring and her membership The Resilient Retail Club.