Growth is Expensive

Everyone talks about how cashflow and how much money you require when starting a business.  It’s drilled into the head of many new businesses how expensive it is to start; the need for sufficient capital so as not to fail.  What people don’t talk about as much is how expensive actual growth is.

The Harsh Reality

When you first start; most of your needs and the work that can be done can be handled by a single person.  As you grow; you find it harder and harder to complete all the tasks necessarily to run a business with just 1 person.    Instead of entering 1 order, 1 invoice, 1 payroll per week; you’re now looking at 100 orders, 10 invoices to enter.  Instead of just shipping 5 – 10 orders a week; you now have to manage 20 orders. You’re growing; but it’s putting a strain on your business.

The Mathematics of Growth

Let’s focus on just inventory.  Say you have 100 products, each of which you keep 2 items  in-stock.  Each of those products you buy for $20.  That’s $4000 in capital that you ‘keep’ in-stock at any time.  Now, let’s assume you get 1 order for each of those 100 products a week (i.e. 100 orders for 1 item);  you actually have 1 item per product (100 items total) in-stock – a happy medium in case of sudden surges so long as you re-stock once a week.

What if you grow to 200 orders for 200 products? Well, if your initial goal was to keep a full week’s worth of inventory on-hand at any one time; you have to increase your inventory by 200 products – another $4000 in capital.

Now, if you take our normal margins into account, that means to build up $4000 in gross profit; we’d have to sell $8,000 of product – $12,000 in Gross Sales.  That’s a very expensive proposition; especially when you take into account this is Gross Profit – not Net.  There’s still a lot of costs; some directly associated (e.g. storage, shipping, processing charges, etc). that need to be paid for.

As I said; growth is expensive.

More Complexity

Let’s add a few more thoughts.   With growth in sales, you’ll need more:

  • space to store your new inventory
  • boxes to ship the new orders
  • employee hours to handle the shipping
  • bookkeeping time to input the longer inventory lists and no. of orders
  • customer service hours to handle the additional questions
  • etc.

The worst part? Some of these costs have to be front-loaded.  You might see a slow increase in sales; but you still need to start stocking up additional inventory before the sales materialize to get the sales.  You might have to hire an employee full-time and find ‘make-work’ for him till sales improve sufficiently to justify him shipping only. And so forth.

Finding the Balance

Finding the balance between necessary growth; planned growth and available resources is difficult.  If you don’t plan for the growth; the friction of insufficient resources will result in unhappy customers and employees.   Yet finding the funds for growth can sometimes be difficult , requiring sacrifices in your plans and goals.

2 thoughts on “Growth is Expensive”

  1. Hey Guys,

    We’ve just started our blog about board gaming, and we’re hoping to post lots of reviews and other fun stuff on there.
    We just wanted to say that it’s awesome to see other women also playing, reviewing, and even selling board games, and doing it all with the smarts and experience you guys do. You’re an inspiration to us.

    Cheers!

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