The hardest truth to learn in business is that not all sales are equal. As much as those of us who are in the business of selling goods or services wish that getting more sales would fix everything, the fact is some sales do more harm than good, but why? The answer is cash flows. For every sale of a product there is a cost associated with it, whether in manufacturing costs, time to receive payment, or labor. Each one of these costs ties in directly to the life blood of doing business—how much cash you have on hand during a period of time—and can have devastating effects on the business if not managed wisely.
Think of it like this, cash flows are the amount of cash coming in during a period of time (revenue) versus the amount of cash going out during that same period of time (expenses). Basically, it’s the breakdown of how much money you have on hand to be able to make payroll, pay rent, buy inventory, while waiting to flip product or be paid on a contract. If either too much is going out or not enough is coming in to meet your obligations, then your business is going to have trouble.
The easiest way to explain this principle is with an example.
Say your business is considering bringing on a new and exciting product line that you are sure will bring in more customers and net you a huge profit. However, before you get all wrapped up in the excitement, you take a moment to consider the implications of this decision and how best to manage this opportunity.
Revenue: This product line is worth $10,000. This means that you are guaranteed to make $10,000 if you sell all the product. Revenue is the total amount this product line is worth once you sell it.
Profit: Profit simply means that you make more money than it costs to purchase the product. In this example, say the wholesale price on the product is $5,000, so if you’ve done your math right that means that you will make a $5,000 profit. Not bad for one product line.
Cash Flow: Here is where things can get a little tricky. Say that this product normally takes 3 months to sell in its entirety. This means that to make your $5,000, you will need to float your business for at least 3 months in order to make your money back and turn a profit. That’s your cash flow. You need to be able to stay in business and pay all of your expenses while you are waiting for this product line to produce actual cash for you to use.
Every business at one time or another has been caught in this cash flow crunch. When they’ve focused too much on the revenue and not enough on understanding when the actual cash will hit their account and be available for paying their expenses. As you multiply this out across every product line a typical smoke shop or vapor store offers, it’s no wonder why so many shop owners have a hard time exploiting new opportunities. So much of their cash is tied up in inventory they’re waiting to turn into usable cash.
So what can be done? The easy answer is to be aware of how much time it takes for your inventory to turn into money. The hard answer requires a bit more work. First, identify the most profitable and least profitable items in your store. Make a list, check it twice, and see where you are allocating the majority of your money. You may learn that too much money is being spent on products that take forever to sell and whose margins are too low to warrant such time, space, and inventory. Next, get those products out of your store—put them on clearance—and rearrange the new space to make room for your best products (most profitable products) and allow your customers to buy things that make you more money, faster.
Not managing your cash flows correctly is the single greatest internal threat every business faces. It truly is the silent killer. Missed opportunities and poor daily sales compound as cash flow mismanagement continues. Time and labor end up being wasted on products that yield low margins while you work harder and make less money. Don’t let this happen to you, get a hold on your cash flows and enjoy the prosperity. SSA
James Deighan is Director of Marketing with JJuice LLC. Mr. Deighan has over 4 years of experience directly involved in the vape industry and 2 years as acting director of marketing for JJuice LLC. Prior that that, he had 4 years of business experience in Sales, Marketing, and Strategy at Qivana LLC. He can be reached at 801-331-8919, or by email at [email protected] or visit his website at www.vapejjuice.com.