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.
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
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.