Losing Money While Making a Profit
One of the biggest mistakes a startup business owner can make is believing that making a profit and having cash flow are the same thing. They're not. It's quite common for startup watch companies to be profitable - and even pay taxes on their profits - yet have no cash flow. Worse yet, for some, the cash flow is negative, and the owner is losing money.
How is this possible?
Microbrands are manufacturing businesses, which make money by selling a product. We need to contend with the financial challenges of producing and maintaining inventory while paying overhead and sales costs.
Most startup business owners understand the basic concept of making a profit by selling their product for more than it costs to produce. And most pre-launch startups will try to estimate their sales volume (how many units are sold in a time period) and their ongoing operating costs.
But sales volume and these costs are difficult to predict before a business starts. Even after a business is started, it's often a challenge for the business owner to foresee the impact of too-low turnover and too-high costs on their cash flow.
We tend to get caught up looking at production costs versus prices - the elements of "gross profit", but not see the bigger picture, or how it changes as time passes. Time is not on our side.
If our sales volume and inventory turnover aren't high enough, the sales and overhead costs will gradually eat up all the cash flow, leaving the owner with nothing, except maybe a tax bill for the "profit" the business earned.
How can microbrands avoid owning a business which makes a profit but produces no cash flow? In Microbrand University, we'll delve into the key drivers of both.