Forums: Discussions for entrepreneurs and small business.

Hey all, I hope someone can help me with my issue.

 

I stated a business selling a product that I basically buy from individuals and resell online and to some other small companies. I started out just purchasing a few hundred dollars worth of product a week and doubling my money. 

 

My biggest expense is advertising in the newspaper and also online.

 

I did not have any starting capital and just used my personal money i have in the bank.

 

So here is my problem.

I generat about $10,000-$12,000 a month in sales. My cost to purchase the product is about $4,000 a month and my expenses are around $1,500.

 

Well as soon as I make my profit I have to use the money to buy more product.

 

What can I do to build up some capital?

 

Thanks

 

Steve 

 

 

  

 

 

 

Steve:

You just laid out the perfect example of why I am always preaching to my clients you need to know the cash flow not just the profit.  So here's my looking for the money options:

1. From the number you gave, you have a 40% cost of product and a 45% net profit, so you should be adding 5% per month to the available cash balance. But at 500 per month (5% of the 10k), its going to take you 8 months to build the 4000/mo you need to pay for the products. You are moving in the right direction, just more slowly than you'd like.  
2. From the basic description you gave, this may not really be an option in your case. But the easiest way to build up some cash is to manage the timing of payments; i.e. get paid by customers as fast as possible and delay payments for expenses.  As a small business you may not have many options, but for example are your advertising vendors giving you 30 day tersm and do you take advantage by waiting 30 days to pay.
3. You already have a robust gross margin on the product and the operating expenses are reasonable, so I presume there is little option to make the profit larger to build capital faster.

Warning- if you are growing, you will need to monitor the cash. Because if sales move up to 15,000, you will need 6,000 to buy the products.  So you may need to put some cash into the business.

Good luck. Sounds like a nice opportunity.

Spot on from MaggieV, you really don't give enough information to be able to fully develop an answer.  Is your problem cash flow in that you are getting more orders than you can get product for?  If that case it could be a timing problem what with paying your vendors now and receiving your product later.  Negotiating different terms from your vendors might be the best way to go.  You don't have to let lack of inventory prevent you from making sales that way.

The question I would ask is “How did you arrive at your selling price?”   Is it high enough to actually allow for growth of your business?  The Harvard School of Business has a wonderful tool for calculating your percentage of markup based upon your acquisition cost for an item.  Might be worth checking your selling price with this tool.

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The older we get, the more excuses we make for not chasing after our dreams. But truth is, goals are attainable at any age.

Hi all, this is great information and advise. I have not been it the forum for awhile so this is a very late thank you.

 

Steve  

 Maggie i agree with you and you have provided to the point review of his problem.

 

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