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Is There Such a Thing as a Bad Sale?

Every company wants to increase sales – more customers, more profits, and more cash flow. But, increasing sales can be dangerous as well. It can have adverse effects if not handled properly.

Here are two reasons why increased sales might be BAD for a company ...

  1. Selling the Wrong Thing to the Wrong Customer can be difficult, expensive, and risky.
  2. Financing Sales Growth can put a strain on cash and working capital.

For these reasons (and others) a company should look at increasing sales with a critical eye and proceed with caution.

1. Selling the Wrong Thing to the Wrong Customer

Every company has its own particular areas of expertise. It is in business because it understands the needs of a select client base. It knows how to deliver the goods and services those clients need. Growing sales usually means getting new clients to buy new products and services.

Some Sales are Better Than Others

Before attempting to expand its client base and offerings, a company should consider that some sales are better than others. Likewise some sales are worse than others. Below is a list of several scenarios (in order of desirability) a company looking to increase sales should consider carefully:

  • More of the Same Product to Existing Customers: Often, a customer will spread their purchases over two or more vendors. This is a good business strategy for them – not looking to a single source of supply to protect against interruption of supplies. By demonstrating stability and reliability, a company can capture a greater share of a customer's purchases. Because the transaction costs are reduced significantly – greater sales with the same effort – a portion of the savings can be passed along to the customer. This benefits for both parties.
  • Additional Existing Products to Existing Customers: This involves going through the customer base to determine which products (or services) the company already offers are not being bought by existing customers. This is less expensive because it involves contacting customers the company already has a relationship with and offering them products the company already understand.
  • New Products to Existing Customers: While it can be risky and costly to acquire expertise in new products, selling them to existing customers can be more profitable. It will extend the relationship with the existing customers.
  • Existing Products to New Customers: This is less desirable because of the cost of acquiring new customers. Not only does the company have to attract a new customer and convince them to buy, but they have to make sure the customer is profitable, pays on time, and is a good credit risk.
  • New Products to New Customers: This is the worst situation to be in for a company. Not only is it difficult and expensive to attract new customers, it is riskier to sell products the company is not familiar with.

2. Financing Sales Growth can put a strain on cash & working capital

Increased sales are a 'net user' of cash and working capital. Depending on a company's entire sales cycle – acquiring raw goods, adding labor for finished goods, shipping and invoicing for the product, and waiting through the collection cycle – increased sales can put a severe strain on cash flow and working capital.

  • The company must acquire the raw materials to manufacture the goods. Depending on the length of the production cycle, the purchases will have to be made well in advance of the sale and collection of payment from the customer. Regardless of whether the company uses existing cash reserves, trade credit, or borrowing, it will place a strain on its working capital.
  • The company must meet the payroll for the labor to produce the goods. Even if the raw materials can be financed for a period of time, payroll is much more current – usually weekly or at least bi-weekly. Expanded payroll must be paid from cash or borrowings. Employees don't give trade credit. If they aren't paid, they likely won't show up the following week.
  • Giving a customer trade credit is standard for most sales in today's economy. Even when the customer pays promptly, the company will usually have to wait thirty days or more for their cash. If the customer is slow in paying, it makes the situation worse.

Even if a company does have a good net profit margin – say 15% or more – it will put a great deal of strain on their cash and working capital. The company will have to spend 85% of the sale in advance (often two or three months) of receiving the payment from the customer, replenishing cash and working capital, and using the profits to finance more growth.

For these reasons (and others) a company should look at increasing sales with a very critical eye and proceed with caution. Yes! In some cases, there can be such a thing as a BAD SALE!

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