Pursuing the Big Sale

By Mel Ingalls

There comes a time in many small businesses when the business has the opportunity to make a Big Sale, a sale that will single handedly increase turnover by 30, 50, even 100%. You are excited. Thrilled! "Finally!" you think. Here is your opportunity to pay off your debts, get that new piece of equipment you have wanted, hire that new assistant. "I've done the hard part," you say. "I've made the sale. Now all I have to do is deliver and collect the money, and I've been doing that ever since I started. I am good at that." And you are good at that.

What you may not have considered, though, is the impact on your cash flow. Historically, you have bought some raw materials, made your product, sold your product, and collected the money. Then you have started over again, perhaps buying a bit more raw material this time, and making and selling a bit more. That is how you have grown to the point where you are today. When you first started out, you had to come up with the money for the raw materials up front, and you had to wait until the customer paid you before you could buy more raw materials, and most of your customers pay within 30 days. This system has worked well for you.

Now, you need to buy a lot of raw materials to fill this big order, and it will take you six weeks to make all the finished product. You have committed to deliver within two months, so you are alright there. But let's take a look at your cash flows.

Your cost of materials is 25% of your selling price, and labour adds another 15%. You have to pay for this up front, so if your customer pays within 30 days, you have been out of pocket a lot of money for a business your size for up to three months. And if your customer stretches out the payment to 60 or 90 days, well, you get the idea…

So how do you deal with this situation? It really boils down to a matter of cash flow and risk. Is it worth the risk to take this order? What if the customer never pays? Are you really willing to bet your entire business-everything you have worked for-on a single sale? If the answer is yes-and a lot of times it is-then you will want to manage your downside. There are strategies available to you as a small business person:

• You can get your customer to share your risk by giving you a down payment at least large enough to cover your cost of materials. That way, you don't hurt your credit with your suppliers even if the deal goes bad.
• You can split the order into two or more pieces. You deliver one order, get paid, and then start working on the next. This is what you have always done before, and it has worked well; so see if you can convince your customer to break up the order over time.
• You can factor the debt. A simple search on google.co.nz will lead you to companies that will purchase your customers' debts from you. Keep in mind that there is a cost for doing this, so you will not make as much as you would have on the Big Sale. And many times, if the debt goes bad, there may be recourse against your business. But factoring can be a good way to manage cash flows in unusual circumstances.

The only way your business is going to grow is by increasing turnover, so by all means, pursue opportunities. AND…be aware of any hidden risks in those opportunities. Plan out how you will manage those risks ahead of time, and both you and your business will be healthier for it.

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