Never is the maxim, “cash is king” more relevant than when scaling an early stage product business. Get it wrong and you can end up over trading; generating more demand for your product than you can handle. A problem that, in the same way as achieving poor demand, can lead to the end of any business.
Typically, a product business may struggle to meet demand due to:
Some start-ups will seek additional funding to cover the operating cycle in the form of trade finance, or may dilute some of their equity to plug the cash shortfall. But this is not always an option, and it’s not always the best approach. You risk unnecessarily diluting your equity to put stock in the hands of customers; or may end up taking on expensive trade finance arrangements that eat into your margins.
However, there are alternatives to simply throwing cash at the problem. It is possible to implement operational strategies that will reduce the operating cycle and help grow sales, turning the process on its head.
Improved Supplier Terms
It seems simple (and it is) so long as you invest in and maintain a strong relationship with your suppliers and manufacturing partners. It’s important you are seen as a good customer before embarking on this strategy, so make sure you visit your key suppliers at least a twice a year – go out for dinner with them and give them enough business so that you are an important customer to them.
Importantly, you must stick to your agreed payment terms at all times. This will give you invaluable goodwill with your suppliers, which can be drawn upon when you get hit with a huge order that you don’t have the cash flow to support.
By slowly building up trust, you may get to the point that your suppliers, whether domestic or overseas, are comfortable extending longer payment terms to you. If you can plan out your growth and forecast the times when your cash will be stretched, you could also request temporary improved terms for a short period of time
Aim to have a clear picture of what your demand is likely to look like over the coming 12 months. This is good practice but can also help to smooth out some of the cash flow slumps during peak trading seasons.
By sharing stock forecasts with your suppliers, you will not only show that you are a growing business that they should support, but you can use the forecast as a way to facilitate discussions – such as around them holding certain levels of raw materials for you, or even holding finished stock levels and allowing you to pull off product as needed, as opposed to having to meet large minimum order quantities.
Seek International Proforma Customers
A great way to bring some cash in to fuel your growth is to work with customers that are willing to pay you upfront. These will typically be overseas distributors that do not expect to be extended any payment terms, and certainly not in the first year of doing business with you.
Another advantage of working with such customers is that you can agree sales targets with them upfront, which further helps you to forecast demand and share such capacity forecasts with your suppliers.
You will be able to seek deposits from these customers in order to secure larger orders, meaning it is possible to completely turn the operating cycle on its head, so you have your cash in ahead of any outlay to suppliers or manufacturing partners.
Improved Terms with Existing Customers
Finally, don’t be afraid to negotiate improved terms with your existing customers, to see you through peak trading times.
You can make this more appealing for them by offering incentives such as early payment discounts, or free stock in exchange for reduced payment terms. It is in your customers’ interest to see you succeed and be in a position to fulfil the demand they generate. Don’t be scared to remind them that you are a growing start-up and that cash must be managed very carefully.
If you have a well-designed product that fulfils a distinct need, or solves an important problem, and you think you can sensibly answer the above 10 questions then get in touch. Applications for funding through the latest British Design Fund are now open, and can be submitted here, or for more information email us using firstname.lastname@example.org.
If you are interested in learning more about how you can invest in future British Design Funds, then please visit https://growthinvest.com/investment-opportunities/fund/british-design-fund-2/
You may also be interested in: