How to Manage Cash Flow in a Product Business

You can have a great month and still not be able to pay yourself.

That is the part nobody warns you about. Product businesses eat cash. You pay for stock months before a customer ever hands you money. On paper you look profitable. In the bank you are scraping.

I ran Incy Interiors for years before I truly understood this. We sold in nine countries and passed $50 million in sales. And there were still months where the profit and loss looked healthy while the bank account looked like a joke.

Profit is an opinion. Cash is a fact.

Profitable and broke at the same time

Here is how it happens.

Say you sell $40,000 of product in a month. Your gross margin is 60 percent. Your accountant shows you $24,000 of gross profit. Lovely.

But that same month you paid a 30 percent deposit on your next production run. The freight invoice landed. You prepaid three months of warehousing.

The profit was real. The cash was already gone.

Profit counts the sale. Cash counts the timing. In a product business, timing is everything.

Where your money actually gets stuck

Every product business runs on a cash cycle. Money leaves, sits in stock for a while, then comes back as sales.

It looks like this.

1. 1You pay a deposit to your supplier, usually 30 percent.
2. 2Production runs for six to twelve weeks.
3. 3You pay the balance before it ships.
4. 4Freight takes three to six weeks.
5. 5Duty, GST and customs get paid on arrival.
6. 6Stock lands in your warehouse.
7. 7You sell it, over weeks or months.
8. 8If you wholesale, the retailer pays you 30 to 60 days after that.

Count the days. From first deposit to money back in your account, four to six months is normal. Longer if you wholesale.

That gap is your cash cycle. That gap is what kills otherwise good businesses.

Work out your own number

Do this today. It takes ten minutes.

Write down the date you paid your last supplier deposit. Write down the date you expect to have sold that stock and been paid for it. Count the days between.

That is how long every dollar you spend on stock is locked away.

Now look at your bank balance and ask whether you could survive that gap twice in a row. Because you will have to. You order your second run before the first one has sold out.

Most founders order run two on hope. Then they discover the money for it is sitting in boxes.

The four numbers to watch

You do not need a finance degree. You need four numbers, checked monthly.

Cash on hand.

What is actually in the bank right now, minus anything already committed. Not your profit. Your bank.

Stock at cost.

The value of everything in your warehouse at what you paid, not what you sell it for. This is your money in physical form.

Sell-through rate.

What percentage of a run has sold, and how fast. If a style is at 20 percent after three months, that is not a slow start. That is trapped cash.

Committed spend.

Every deposit, balance payment, freight invoice and bill you have agreed to but not yet paid. Put them on a calendar with real dates. Most founders keep this list in their head. That is exactly where the nasty surprises live.

Four numbers. One page. Once a month. That is the whole system.

How to shorten the gap

You cannot remove the cash cycle. You can make it shorter.

Negotiate your terms.

Deposits are not fixed by law. After your second or third order, ask. Twenty percent instead of thirty. Balance on shipment rather than before. Suppliers say no sometimes. They also say yes more often than you would expect, because a reliable repeat customer is worth keeping.

Order less, more often.

Smaller runs cost more per unit. They also free your cash faster. A slightly worse margin you can actually reinvest beats a beautiful margin sitting in a box.

Take deposits yourself.

Pre-orders are the cleanest cash in a product business. Your customer funds the run. The pre-order guide on this journal walks through how to run one properly.

Get paid faster on wholesale.

Offer a small early payment discount. Two percent for payment in seven days costs you far less than three months of your money being someone else's working capital.

Deal with dead stock.

The style that is not moving is not an asset. It is your next production run, trapped. Discount it, bundle it, sell it at cost if you have to. Cash you can use beats stock you cannot.

Hold a cash buffer.

Aim for enough in the bank to cover your next deposit plus three months of fixed costs. Boring advice. It is also the difference between negotiating from strength and taking whatever terms you are offered.

What I would tell my earlier self

Stop measuring the business by revenue.

Revenue is the number everyone asks about at dinner parties. It tells you almost nothing about whether you can pay yourself next month.

Measure the cycle instead. How fast does a dollar go out, turn into product, and come back with a friend? Shorten that, and everything else gets easier. Ordering. Hiring. Sleeping.

The founders who last are not the ones with the biggest launch. They are the ones who worked out that a product business is really a cash flow business wearing a nicer outfit.

Your next step

Open a blank spreadsheet. Four columns: cash on hand, stock at cost, sell-through, committed spend. Fill it in for this month. Do it again next month.

You will see the pattern inside a quarter.

If you are earlier than that, still working out what to make and what it should cost, that is exactly what The Product Path is built for. It takes you from idea to factory-ready, with the numbers checked before you spend, not after.

Build the asset. Do not just be the asset.