Cash Flow ctd.: First Run to Steady State

Here’s the Review of the Cash Flow Chart:

First Manufacturing Run

Notice, so far none of the outputs have been cash!  To do things right, you need to be able to make these investments and THEN have money available to produce the first manufacturing run which won’t really start selling for many months after you make the deposit.  It’s a good thing to think about at the very beginning of the process as you might not want to quit your day job just yet.

If things have gone well so far and you’ve gotten enough good feedback from the market and have a soundly manufactured product in hand, then you are ready for the real deal.  The first manufacturing run will likely be the minimum order quantity (MOQ) of the factory (you were only able to get the factory to make below the MOQ for the seeding run because you were very nice, persuasive, and paid a little extra money to make it worth their while).

The main purpose of the first production run is to have (a lot) more product for seeding the market and to actually start selling some product and seeing some input into the cash flow equation.  

After the seeding stage, you probably aren’t ready to approach big box suppliers.  They will want to know a lot of details that weren’t answered with your small run.  But, after you’ve successfully pulled off a regular order and are starting to see sales, it’s time to start knocking on those doors.  You also now have enough product to send one to every potential market influencer on the internet.com.  Do it.  Make sure you get your idea out there and give it a fair chance at success, you never know who or what will be the stepping stone to the holy grail of product success: national/international distribution.

Input: Money for the enough products to meet the MOQ, final designs and packaging
Output: Cash from sales (Congratulations!), major seeding of the market, customer feedback, potentially, more funding

Steady State Manufacturing

Once you are ready for your second order, you have reached a nice plateau.  After this, you will make some small changes to your product and perhaps get your next great idea from the experience, but overall you should be at a relatively steady state.  The design is finalized, manufacturing details and hurdles have been worked out, the market knows about you and product is selling.  There can be changes to packaging or bundling to think about, but overall you’ve gotten over the hump.

As you’re thinking about this stage before you’ve arrived though, you must really consider cash flow.  This is where it gets the most difficult for two possible reasons.  Most people think of the scenario of product not selling and not having enough cash from sales of the first manufacturing run to place the initial steady state order, but, actually, the cash flow problem is much worse if your product is wildly successful.  If your product is flying off the shelves, you still probably aren’t seeing that money right away, but you have demand and so you have to place a bigger order, more quickly.  Even though you haven’t been paid, you still have to fund the 50% deposit of this big order with the factory in order to get them started (after you’ve begged and pleaded and tried to make them understand that things are going really well and they really, really will get paid if they would just make the product!).

In fact, if things are really going well, you might not make back your initial investment for many manufacturing runs as each subsequent run is significantly larger and each deposit significantly higher.  You may also have new product ideas to piggyback on your success that need design investments.  It’s a good idea to go through the possibility of success before you get there and think of where those monies can come from.  If you’re not prepared, you may end up having to take a funding deal that is second best in order to avoid burning bridges with your avid customers.

Input: The cash for the product
Output: market demand first (if things go well), cash from sales second

Final Notes on Cash Flow

Cash flow is the single most important, consistent-across-the-board aspect that will determine if a small business succeeds or fails.  Dividing your business planning into the cash flow cycles is a great way to make optimal decisions.  The outputs from each stage will quickly guide you to understand the best inputs for the next stage.  As such, define your inputs to each stage so that you get the most value out of your outputs, not just monetarily, but with careful attention to detail in all of the phases of your business.  Know exactly what it is that you expect to get out and only invest your money into those inputs that get you the information and progress you need to move into the next stage.  Always remember the end goal, national/international distribution.