Tuesday, November 22, 2016

New businesses fail because of expansion

Many new businesses do not fail because they cannot get sales.

Many new businesses fail because they expand too fast.

The reason is very simple.

When you have a factory that makes and sells $2000 worth of goods every day, you need $1000 for raw material and other fixed expenses.

The suppliers see that you are new, and require you to pay in cash or give you 30 days credit term.

The customer requires you to give 60 days credit term, or else they will buy from others.

You must have enough cash for 30 days, or else your business sinks.

If you keep on getting sales, and you must make $20,000 worth of goods every day, you must have enough cash flow to buy the raw material and pay the overtime of your workers.

You start to take bank loan.

If the customers delay payment by one or two more months, and you run into cash flow problem, and default on payment, your business sinks.

That is why fast expansion is never good. 

No comments:

Post a Comment