Don’t celebrate your growing sales until you answer these 3 questions

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Ideally, marketing and operations will work together to answer these questions to drive sales growth. With the right answers and planning, rising sales are something to celebrate.

Businesses spend money on marketing in an effort to increase sales. The expectation is that when that marketing works, the business will be more successful.

Unfortunately, that may not be true.

Here are three important questions for you to answer before you celebrate rising sales:

  1. Do you have the liquidity to support them?
    Most businesses have a lag between when they must pay workers and suppliers and when they get paid from customers. The longer that lag, the more money the business requires. If you pay suppliers Net 30, receive customer payments net 60 and have 30 days of inventory, you need a minimum of 60 days cash to stay afloat.

    By cutting your inventory in half, you only need 45 days of cash. By also changing your customer payment terms to net 30, you have reduced cash required to 15 days.

    Manage these numbers and do not think stretching suppliers will solve your problems. Their refusal to deliver to you can shut your business down.

    Growing sales increase supplies and wages required, again increasing the dollar amount tied up. Cash required of 15 days is a bigger number than it was before.

    This “cash to cash” cycle should be measured and strategically addressed to move it towards zero, or better yet, negative. Negative means you are using payments from your customers to pay your suppliers. Your customers are financing this part of your business.

    Mastering the cash to cash cycle through his dual focus on the supply chain and on collecting payment when an order for a computer was placed was a major contributor to Michael Dell‘s success.

  2. Do you have the infrastructure to support them?
    If your marketing efforts result in a near-term increase in demand that your operations cannot satisfy as promised, you have created unhappy customers and hurt your business.

    As demand increases, your operations will face a bottleneck. That limiting factor can be supplies, engineering, a piece of equipment or other aspects of fulfilling orders as promised.

    Know where that bottleneck will be and manage it well. Capacity management, effective use of bottleneck operations, and sufficient capacity are all required to satisfy rising sales.

  3. Are they good sales?
    Not all markets are desirable, nor are all customers or orders. The wrong sales can drive you out of business.

    Accepting expedited orders that create a bottleneck, even with significant upcharge, can delay shipment and collection of consequential orders and breed broad dissatisfaction.

    Accepting a customer with specialized requirements can cost much more than it’s worth. Some may be more erratic, demanding and ruthless than you are prepared to handle. The big name customer, the huge order or the opportunity to break into a new market can be captivating, but the risk reprisal can be equally overwhelming.

    Ideally, marketing and operations will work together to answer these questions before sales rise. With the right answers and planning, rising sales are something to celebrate.