Lessons from Fenway Park
Businesses looking to increase their sales can hit a home run by planning for the challenges that come with growth.
Even when you take some time off, you can see the pet industry in all kinds of places. Fenway Park in Boston has a wall in left field known as the “green monster.” Legend says the green monster was built to prevent people who had not bought a ticket from being able to see the game for free. Just like in baseball, the pet industry has its own green monster—that monster is sales growth.
The problem with a big upturn in sales is that it creates a problem of having the necessary cash to pay for the inventory and operating expenses. The only thing the growth monster eats is cash. Whether you are brick and mortar, online or service oriented, the monster is there. The problem is that the dealer often cannot see what is on the other side of the sales increase.
Having a profit is great, but the question is whether or not you will have the cash on hand to pay the bills as they come due. This is called cash flow, and you either have it in your business or you do not. The good news is that poor cash flow can be fixed.
The problem arises because a sales increase requires a business to spend money before the income arrives. The business is not going to suddenly increase sales with the same inventory. A sales increase occurs because of an increase in inventory, an increase in advertising or a decrease in margin. All three of these change how much cash comes into your checking account.
Unless you are going to persuade your vendors and employees to allow you to pay your bills on a much delayed schedule, somehow your business is going to have to come up with cash to sustain the growth. You might consider going to the bank and borrowing money, but whatever interest rate the bank charges you is going to reduce the net profit on your income statement by a like amount.
Does this mean that a sales increase is bad for your business? Absolutely not. You are only going to make more money by increasing sales, decreasing expenses, improving your margins or a combination of the three. As all experienced retailers know, there is a limit to how much you can control expenses or increase your margins. The rest of your profit increase will have to come from increased sales.
The “home run” for your business occurs when you are able to plan the sales increase. This means that you can calculate the increase in operating expenses and what your margin will be and with that information create a budget for your store. The suggestion is that you create a budget that projects twelve months in advance.
Once you have created the budget, consider how much cash you have on hand at the beginning of the first month, and then look at what is going to affect that amount. You add the profit to that amount, but you also have to consider how much inventory you are paying for during the month. Also factor in the principle payment on any loan, as that amount is not on the income statement. You also consider depreciation, as it is a non-cash item.
The resulting number is the anticipated amount of cash on hand at the end of the month. Perform this exercise for the twelve consecutive months and you have a 12-month projection of cash flow.
Are you seeing numbers at the bottom of this projection that are too low or a negative number? That is an indication of an oncoming cashflow problem. Now you are in a position to decide if you want to control the sales increase or borrow money to cover the deficit.
At the ball game, it feels good being on the right side of the green monster; you get to enjoy some food and the game as you have paid for your seat. The same is true for your business. You want to be on the right side of the green monster, where you can see what is going to happen.
Tom Shay, principal at Profits Plus Solutions, is a fourth-generation small business owner. His teachings provide the “nuts and bolts” necessary to improve the operation and profitability of the business. Shay has authored 13 books on small business management and a college textbook on small business accounting and business planning. Having written more than 400 columns in 75 trade publications, he has been nominated three times for the Jesse H. Neal award for editorial excellence in business media. He has earned the Certified Speaking Professional distinction, which has been attained by eight percent of speakers worldwide.