Growth Is Not A Solution

posted Jul 17, 2012, 3:51 PM by Andrey Mozuliov   [ updated Jul 26, 2012, 2:40 PM ]

In the situation of cash constrain, many owners consider sales growth as the only solution for their companies. They engage a straightforward logic: more sales drive more sales margin. That sounds right; however, the real-life business is more complicated, and such position can drive the company to nowhere.

Consider this. Let’s say you have a small shop, and you want to increase sales for that business. In order to sell more the business needs to buy more, meaning you need more money. That is the truth the shop is going to sell more, so you will get money back; however, the natural sequence of events forces you to buy first in order to sell afterwards. That means you need to reach deeper into your pockets.

Often, it is not enough just to buy more if you want to sell more. Sometimes, you need to increase a number of titles you sell in your shop. It is essential to remember that each title of a product you sell in your shop is associated with the certain amount of safety stock, and by increasing the number of titles, you automatically increase safety stock. How do you increase them? - you buy them! Do you have deep enough pockets?

That is not the bottom yet! In order to sell more you explore new opportunities and establish new sales channels. You probably go increasing sales on account, or if you have not sold on account, you start. You start receiving money for products with a delay, which makes it even worse.

We do not touch advertisement expenses and other contributors, and stop here.

The growth most likely can bring your business more profits and cash in the long run; however, you need to overcome the growing period itself.

Keeping the Working Capital well-organized and structured is essential for survival.