A little while ago, Entrepreneur and tech billionaire of Shark Tank fame, Marc Cuban wrote an article for Entrepreneur magazine where he listed his top 12 rules for starting a successful startup.
Many of these rules could are applicable to normal “non-startup” businesses (i.e. those of us who don’t need to raise money from venture capitalist but simply want to start and grow a successful company).
A video is embedded below listing all 12 rules, but I want to focus in on one gem that I believe is the most powerful and relevant to all young and growing companies…
“Sales will cure all” (Know how your company will make money and how you will make sales).
This is largely true, and I took it to heart for a while. Sales make the life of your business so much better and so much easier. The more you sell, the more money you have to invest in hiring people to your team.
With a growing team, you have more time to focus on the work you want to, ideally that work best suited to your strengths as an entrepreneur. For me, that would be writing daily while creating and tweaking the systems in our business.
In addition, more sales revenue means more can be invested back into marketing and improving the quality of your product or service.
But then a couple of months ago I stopped to consider whether or not Marc’s “sales cure all” mantra was actually the whole truth.
I came to the conclusion it wasn’t, and taken by itself the idea was not just wrong but potentially poisonous.
Here are the three important reasons why…
#1 – Sales without inventory
A fellow entrepreneur and owner of a service business said so me a while ago: “best to sell and then build out the ass.”
His company makes custom software solutions for large businesses and generates 7 figures in revenue per year.
The process works pretty well for him because he already has a skilled team in place, but things get stressful when a team member gets sick or he has to replace a key hire or “staff up” to accommodate for higher demand (i.e. an influx of more projects).
In these cases, he is facing a problem of sales without inventory. And with the highly technical description “build out the ass” what he means is to go out and hire team members as need to fulfill on the project order.
This works okay for him because he works with large companies, so the volume of project orders isn’t that high.
It’s easy to imagine a business though, even a product business, where selling but not having the inventory on hand to fulfill an order can lead to a problematic situation.
For example, a few years ago we took an order for a large web development project. The project was outside the range of our team’s core skillset, so we had to hire new team members to help us fulfill it.
In theory, this would work. After all, that’s how the company started. We found a couple of clients and then started hiring a team.
Problem here was, we made a bad hire and progress on the project wasn’t happening fast enough. Ultimately, we had to recognize the fact that we couldn’t get the project done then had to cancel the project and credit the client’s account.
The company handled it without skipping a beat, but at in that moment it seemed like a large chunk of cash leaving our account.
Imagine if you were in that situation, but with multiple sales orders back-to-back that you couldn’t fulfill on?
That could easily kill your company. This leads to the second reason sales do not cure all…
#2 – Sales without “the numbers”
The company was the brainchild of Maren Kate Donovan.
Unfortunately it imploded and ceased all operations briefly in August of this year. The company was saved at the last minute when another firm swooped in and purchased all of Zirtual’s assets, and operations have since resumed.
Here’s how Kate described it in a recent interview with Business Insider:
“At the end of the day we grew faster than we could handle… Our burn [rate] spiraled out of control even with our high revenues, and that led to the pausing of Zirtual’s services.”
To avoid falling into the same trap as your sales revenues grow, you want to make sure that you are turning a profit on each and every sale you make.
Some might argue that this is an “old” way of thinking and they profit margin is second to scaling fast and “taking over” your market. I agree — partially — that growing quickly can be a good thing, but only if its efficient.
This best practice of remaining profitable as you grow is supported by research from Stanford professor and best-selling author (Built to Last, Great By Choice), Jim Collins. In his research he found that companies that survived, prospered and beat their competitors by 2-10X every time were focused on being consistently profitable.
This allowed them to store up large reserves of cash in case of something unforeseen, like a market shift, business emergency, or a downturn in the economy.
#3 – Sales without an effective fulfillment systems
Okay so let’s say that you have inventory and that’s not a problem.
And you have profit margin built into each sale — cool.
And you’re growing and receiving more and more sales.
Great, but what happens after the order is placed?…
- Do you have quality controls in place?
- How do you know your customers are receiving the best possible experience?
- How do you know something isn’t broken?
- How do you know the experience and the end-product delivered is consistent?
- If your business is a service business, who plays what role to deliver on the order? How does communication flow? Who is responsible for each part of the project?
Even if you’re selling a simple software product or an e-book, there’s always room for basic systems to break down.
And the more sale volume grows — almost like a law of physics — the more the flaws in even a simple order fulfillment system will be exposed and amplified if not fixed.
- Sales = cash flow = the lifeblood of your business. Without sales, your business will cease to exist in the short or long term.
- But sales alone is not a “cure all” as Mark Cuban has repeatedly said.
- You also need inventory to keep up with demand (and that include labor as inventory as well).
- Your business needs to turn a healthy gross profit on each sale while keeping overhead costs low.
- And you need effective order fulfillment systems that are documented in one place, like a wiki and/or a printed business manual.
If your business has grow quickly in recently years, do any of the points above sound familiar?
If not, do you see how these are risk factors to avoid?