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From the Entrepreneur’s Perspective: What cash flow considerations should I be thinking about now versus later?

The old adage of “cash is king” certainly applies to running a business. Without it, you can’t invest in anything. So, it’s important that you consider where – and when – you spend your hard earned dollars.

 

Manufacturing….

Let’s consider the manufacturing cycle. You receive a PO, most likely AFTER you have started to manufacture product. You are moving forward with manufacturing based on a buyer’s word that they are going to be placing an order. Because if you wait until you have the actual PO, you will likely NOT have enough time to manufacture your product and get it delivered on time. (This is often the case with the larger retailers. You will not get the PO until close to when you have to ship the product to their warehouse.) Of course, however, if you don’t move forward with manufacturing, you may lose out on the opportunity to move forward with a particular retailer. So, you take the plunge.

 

You manufacture product in, let’s say, early January. It takes you 2-3 months to manufacture and ship from your overseas manufacturer so you receive product in mid March. You have to ship your product to your retailer’s warehouse(s) for arrival early/mid April. If you are lucky, your terms are net 30 so you receive your first check in May (net 30 from the date you ship). So, you are floating cash for 5 months (Jan-May).

 

Let’s not forget, too, that you have to manufacture for future POs before you even get the first round of POs delivered to the retailer’s warehouses. You are in a constant state of manufacturing and/or shipping mode. More cash.  So, you must consider how quickly you grow (the larger the retailer, the more stores they have, the more inventory that is required).  Can you keep up with existing customers and add on this new retailer?

 

Now, if you are not so lucky, your terms might be net 60, net 75, or worse: pay on scan or you might have a “hold” on a certain % of dollars returned to you. In order to minimize their risk, some retailers might ask or require that you work off pay on scan or implement the hold.

 

Pay on scan is when you get paid for product as it scans through the register. Your terms could be net 30, pay on scan. So, if your product is not on shelf until May (using the above time schedule), you are looking at getting your first check in June – and that is only for product actually sold.

 

If the retailer does a hold back (a certain % of your dollars are on hold), try your hardest to get the buyer to commit to a certain date by which the hold will be released and/or reduced and what the decision-making criteria are for both. You may not be able to get such a date. Know, however, that if you move forward with such terms that this hold may be permanent and/or virtually impossible to get released and/or reduced – and that you will be constantly floating money. In order to do business with this retailer you may choose to move forward anyway; however, just have your eyes open as to how this will impact your cash situation.

 

Marketing…

In addition to getting your product on the shelf, you have to keep it there. You will need to support and drive sales. So, you must allocate cash for this, too. We will cover marketing in a different blog.

 

OVERHEAD…

Find your breakeven point so you know how many units you must sell in order to become profitable. While many of your costs will increase as your distribution increases, you can achieve economies of scale in many areas such as marketing, fulfillment, salaries, EDI, product liability insurance, legal, etc.

 

Float as much money as you can for as long as you can – in all areas of your business. Negotiate the best possible terms with your manufacturer and suppliers that will allow you to delay payment for as long as possible. Negotiate with your retailers for soonest possible payment terms. Do not be shy to ask for what you want/need. While you may not get exactly (or nearly) what you want, ASK. Get a credit card that will allow you to delay payment – and pay it off in full. The American Express Plum card is one good way to float cash, if you qualify.

 

If you take just one thing away from this blog (and, hopefully, you are taking more than one thing away), it should be to grow organically so you can manage your cash.

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