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.


 

The importance of inventory and cash management

After leaving business school I moved back to my home country and started a retail business with money from family and friends. I had taken classes in finance, operations, retail management, and two in entrepreneurship and had done very well. I felt well-prepared.

I opened a bank account in my home country and started importing stock from the US and China. Sales went really well for the first 6 months. Then the economy started to slow and my sales also slowed. Inventory started to build up and the store began to look bad with stock from different seasons and odd sizes and colors piled up.

I had 30-day credit with my suppliers but I had to place minimum order quantities. The rent had to be paid at the first of each month and the shop staff were paid every two weeks. I did not want to reduce the margins as this would affect my profits even though everyone else in the shopping area where offering 40-60% sale discounts.

I always planned to have 45 days of cash in the bank but with slow sales, suppliers’ payments, salaries and rent, I found myself caught short. I had piles of stock but less than a week’s worth of cash and I could not pay the next month’s rent. By the time I decided to cut my margins and liquidate my stock, it was too late. I had to borrow more money from my family just to stay afloat. It took me 10 weeks to recover and over 6 months to get my credit line back at the bank.