Many of you may think this title is a mistake or misleading or just plain stupid. Of all the complaints business owners have made, this particular complaint may not only be the most baffling, but the most indicative of a serious cash flow problem or problems. The truth of the matter is that it is COMPLETELY possible for a company to sell its way into a very deep hole. Unfortunately selling out of the hole may be harder than selling into the hole.
Let’s take the idea apart and examine some of its implications.
A conversation between the production manager and the sales manager might go something like this…” I can build them if you can sell them” - “I can sell them if you can build them.” Production gears up for much more work. Sales quotas are raised and the race is on. Soon the orders are flooding in and product is being built and shipped at a record pace. The sales graph looks like a hockey stick and management is very pleased. The business model appears validated from the standpoint that there is real interest in and desire for the product or service.
It would be great if the last paragraph was the end of the story. All too often though, this scenario is just the beginning of a much sadder story.
Let’s take a look at the two statements that began the race. “I can build them if you can sell them”. Product can be built in any number of units if adequate resources exist. The tricky part is assessing the adequacy of the resources. Is there surplus plant capacity, or will additional machinery, space, employees, or other needs have to be acquired? If so, at what cost and at what terms will they be acquired? Does the operating budget allow for and is discretionary cash flow available for these types of additional expenses? Is reasonably priced and appropriate financing available? Are there any “hidden” or other unexpected costs?
“I can sell them if you can build them”. The question pattern here is very similar. Are the resources adequate? Are more sales people needed? What will their ramp up time cost? Will the peak demand time decrease before the sales force becomes fully effective? What about additional travel and entertainment expenses? How quickly can those additional costs be recovered? Are there any potentially negative customer service implications? What about the company’s credit philosophy and practice?
Over the years many companies have fallen into the holes created by not asking and answering those and similar questions. As an owner, you may think adequate plant capacity exists. But, don’t loose sight of the fact that tools are more likely to break down under heavier use. Frequently, when production is dramatically increased, routine maintenance may be neglected. So, when the tool breaks, not only is it out of production and generating revenue, it may have to be repaired or replaced thereby creating unplanned expense.
If additional space was needed and staff hired to meet the production requirements, was that space and staff obtained with an eye to the future? What happens if the additional production is a fluke and sustainable demand for the production doesn’t exist? Are there lease commitments that cost money? Can the new staff be easily eliminated, or will it continue to be a drag on the income statement?
In most industries it is very difficult to rapidly and significantly increase sales without some relaxing of credit standards. Relaxed credit standards lead to a longer collection period or in other words a longer cash-to-cash cycle. Relaxed credit standards frequently also lead to increased credit losses. Your company may easily have a thirty day money demand and a forty five or more day cash to cash cycle.
Credit and collection policies are very important and must be carefully considered when planning a dramatic volume increase. Your company needs a clear and practical credit and collection policy which sets out your expectations of your customers as well as your employees. Your customers should be expected to pay on time. Your employees should be well trained in good collection techniques to help you identify and build increased business with your GOOD customers and promptly collect the money due from those customers who aren’t so good. GOOD customers buy product and pay on time. Not so good customers buy a lot of product and pay when they see fit. There’s a big difference between the two that a sound credit and collection policy can help identify to your profitable advantage.
Increasing sales is fundamental to growing a business. However, poorly planned increased sales can lead to cash flow problems and other financial difficulties. Dramatic growth without proper planning can easily leave an owner saying “we’re selling more than ever – but we’re broke”.