When I was a teenager, I spent one summer working in the office of my dad’s machine shop a few afternoons a week. It was a horribly boring job that mostly entailed shredding pay stubs that were more than seven years old. But one memory does stick with me vividly:
My dad, walking into the office and asking, “Did the check come today?”
While I could certainly hear the tension in my dad’s voice when he asked the question, as a teenager, I couldn’t quite appreciate all that was wrapped up in that simple question.
But now, as a business owner myself, I have a new understanding of what it means to open your mailbox with baited breath, hoping that today is the day that the check has come.
I didn’t know it back then, but this one question represents one of the biggest challenges that a business owner can face: cash flow.
Simply put, cash flow is the amount of money that flows in and out of your business.
But when it comes to a product-based business, cash flow is anything but simple.
That’s because, as makers, we have to upfront a lot of our costs, sometimes months (or more) before we actually get the money for those costs.
And I’m not just talking material costs here.
Let’s look at a typical trade show season as an example:
If you’re doing a trade show in August, you’ve got to pay your booth fee months in advance. Add in the cost to get your booth to the show, make your product samples, and hotel, food, and transportation, and you’ve likely shelled out anywhere between $5k and $10k before you even get to the show.
Setting aside the problem of how to fund this show in the first place (funding is something we talk about in my Creative Live class, Make a Living Selling What You Make), let’s assume you had a good show. You walked away with $20k in orders, scheduled out over the next three months!
Congratulations! You’ve had a profitable show!
But here’s where cash flow makes things tricky.
Your bank account was already looking pretty tight before the show started, but you don’t have the money in hand when you walk out the door. You may have collected some credit card numbers to charge when the order ships, but after you’re home from the show, it may still take you a few weeks to make the product and get those orders out the door.
And for existing accounts, you’ve probably offered NET-30. Which means the store has 30 days to pay AFTER the order has shipped.
All of this means that you won’t start seeing money roll in until September or October for a show you probably started paying for in April.
Now, I’m not telling this story to turn you off of wholesale. (Because the flip side is that by October or November, when you start to see the checks pour in from those orders, wholesale becomes your best friend!)
Rather, I want to illustrate the realities of how cash flow can impact your business. Because while I’ve spent years trying to encourage makers to be honest about money, the challenges of cash flow still aren’t discussed that often.
And not having a handle on your cash flow can spell the difference between success and failure when it comes to your business.
Fortunately (or unfortunately, depending on how you look at it) I’ve had years to muddle my way through the challenges of cash flow. I can use the struggles of cash flow during trade show season as an example because it’s been my reality. More than once.
But that also means I’ve developed a few strategies to help mitigate the challenges of cash flow. Full disclosure: these aren’t sexy strategies. But they are important practices for a healthy business!
1. Keep track of your income and expenses every month and try to spot patterns.
I keep a spreadsheet of my income and expenses each month for every year of my business, and it’s the most important tool I have for spotting challenges when it comes to cash flow. After tracking this for a few years, I can say with confidence which months are going to be tight and which months are going to be ok. (Case in point: I almost never turn a profit in February.)
By tracking not just your income, but your expenses, and paying attention to how it changes, you can begin to spot patterns in your business and plan for inevitable bumps in the road. Learning to look at your business this way means you can plan and forecast for the next few months AND it also keeps spending in check when you do have a lot of money coming in. (It can be tempting to want to make big purchases in December when you’re flush with holiday cash, but when you can look at a spreadsheet and know that money has to last until March, it’s easier to be fiscally responsible.)
And if you’ve been bad about tracking your numbers in the past, go back and create these spreadsheets. It’s easier to move forward when you’ve got a record of where you’ve been.
2. Balance long-term payments (like NET-30 wholesale accounts) with quicker infusions of cash (like a craft show or online sale).
Once you start tracking your income and expenses and spotting trends, you can identify months that might be a problem and plan accordingly.
Nothing stabilizes your business like consistent wholesale orders, but it can also be frustrating to work your butt off getting a big wholesale order out the door knowing you won’t see the cash for another month. That’s why it’s important to anticipate times when you might be cash strapped and add in revenue streams that give you a quicker infusion of cash.
And the sky’s the limit when it comes to these different revenue streams. I have friends who mix in retail craft shows with their wholesale business to keep the cash rolling. I’ve used online sample sales and new product launches in my online store to balance out slower wholesale months. And it doesn’t have to stop there. Freelance design projects, consulting, or even teaching a class or workshop can all be ways to boost your revenue when you’re caught in a cash flow black hole.
3. Automate money into savings to create a buffer for when things are tight. (And to save in advance for big expenditures.)
I’ve said it many times, but it always needs repeating: The smartest thing I’ve ever done for my business is commit to regularly putting money into savings.
When it comes to running a product-based business, spending can easily turn into quicksand. There’s always something to buy, whether that’s materials, equipment, or marketing. Which means it can be really easy to burn through any money you’ve got coming in pretty quickly. And never feeling like you have enough money can lead to an overwhelming sense of panic that can wreak havoc not just on your business, but on your creativity. (I know. I’ve been there.)
Enter, the humble online savings account. A few years ago, I set up a savings account through an online bank (separate from the bank I use for my regular business and personal accounts). The online only bank has a slightly higher interest rate, but, more importantly, I don’t see that money when I log into my main bank account. (This means I’m much less likely to draw from it for something stupid.)
In my first attempt at saving money for my business, I would always move money over when my business bank account was above a certain threshold. But as I worked to grow my business (and spent more) it became more rare that my bank account was above that threshold. Which meant I stopped putting money into savings. So now I use a new system that I recommend for all creative business owners:
Set up an automated withdrawal that puts money into your savings account EVERY week.
Now, I realize a withdrawal every week seems crazy when you don’t make the same amount of money every week. But the trick is to start small, with an amount you won’t even miss. Of course, small is relative. It could be $5. It could be $50. But the trick is to get started. Overtime, you can gradually increase the amount you save each week. (Over the course of a few months, I actually went from saving $50 a week to saving $500 a week!)
By automating savings, you’re instantly creating a buffer for months when cash is tight, and adding a lot more stability and security into your business.
And you can also use this strategy to plan for major business expenses in the future. If you know you’ll need $5k to do a trade show next year, figure out how much that works out to a week and start automating that savings now.
When it comes to growing your business, cash flow can be challenging. But it doesn’t have to destroy your business. By acknowledging the challenge and planning for the inevitable ups and downs as much as possible, you can reduce a lot of stress.
I’m not saying there won’t be weeks where you anxiously open the mailbox, hoping for that check. But by confronting the challenge head on, hopefully those weeks will be few and far between.
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Want to hear me get real about the realities of running a product-based business? Check out my interview on Sarah Cooley’s podcast, From Maker to Manufacturing. Sarah created her podcast specifically to address the challenges of running a maker business, and in my interview, we get candid about money, cash flow, and why I took a year off from my main trade show. Click here to listen!