Every business (or business project) has a unique potential for success that is realized when all the key elements are put together in just the right way. Once you understand this recipe, profits come to you reliably and regularly. The challenge for new ventures is to keep the cash flow positive while the recipe is being figured out. The way to do that is to give priority to those sales transactions that produce the cash flow you need.
Put differently, your No. 1 job when you are launching a profit-making venture is to generate as much positive cash flow as possible so you can survive long enough to test and prove your profit scheme. Let’s say, for example, that your business idea is to sell reading lamps through space ads in the back of magazines. The profit scheme is to break even on the initial ad — to have your cash sales equal your advertising expense — and then to pay for the fulfillment and make a profit based on selling new customers other products through a small catalog.
For such a profit scheme, you would need to test various ads in various magazines until you found a sufficient number that gave you the response rate your scheme required (i.e., 100% of your advertising dollars back to you). Then you’d have to continue placing ads in those magazines while you fulfilled the purchase orders and then sent out and took in sales with the catalog. The whole process — from creating the initial ad to selling through the catalog — might take six months.
So, you would need to have six months worth of cash flow put aside … just to make sure you can complete the entire selling cycle and truly test your profit scheme. Here’s a trick to make your cash last: In the beginning, focus on the highest-margin efforts. That is to say, continue placing ads only in those magazines that have above-needed response rates. In this case, that would be those magazines that generated more than enough cash to pay for the ads — maybe enough to cover fulfillment and leave something to pay for the catalog mailing.
By focusing on your highest-margin sales transactions, you give yourself the most possible cash flow to keep you going while you can still test the profit model fully and completely. Some new business owners confuse cash flow with sales or with having money in the bank, Brodsky warns. “They believe that to be successful, all you have to do is generate sales. In fact, what you need is the right kind of sales. The wrong kind can drive you straight into bankruptcy.”
You have to have a business plan that shows you how you will have the cash you need to get from start to viability — when the business generates, internally, enough cash flow to pay its bills. Said differently, you want to focus on the sales activities that generate the greatest gross profits, because those are the ones that leave you with enough cash to take care of your monthly nut (payroll, rent, etc.). If your monthly nut, for example, is $5,000 and your gross margin is 10% when you sell by phone, you will have to sell $50,000 worth of product each month in telesales to break even.
If your gross margin on direct mail is 30%, you will need to make only $15,000 in sales each month to cover your nut. In this case, you are better off focusing on direct-mail sales in the beginning — even if your business plan calls for an eventual move into telesales because the market there is larger. To reiterate: In the beginning, focus on the marketing schemes that give you the greatest gross margin. Later, after you have enough cash flow to fool around, begin testing the lower-margin (but potentially more interesting) selling schemes.