We expanded without thinking about margins and cash flow

Our sales growth was rapid and very quickly we found that we were doing a lot of business in a city 60 miles away. The transport and service costs were high so we opened a depot there.

We only had 12 people in the company. One person moved and we hired two more. The extra salary and rent meant that all the operations in the new town were unprofitable. We needed more sales quickly. I sent our best sales person there and we saw a 20% increase in volume but the margins were low. At the same time sales in our home market stopped growing. 

By the third month with the new depot, the pattern got worse with an actual decline in the home market and only 5% growth in the new market. We weren’t covering our operating cost and the cash flow turned negative. I closed the new depot, which meant writing off our investment and closure costs. It took us three months to regain our sales momentum and we will lose money this year.

There were some clear lesson here, sales without margin are useless, margin is necessary to cover fixed costs, and start up cost for a new depot take more cash than you ever anticipate.