Constant sales growth can be a trap. Many years ago, I had a client who had experienced consistent growth year after year. He was justifiably proud and frankly a bit arrogant. He had an over inflated sense of self-importance and invincibility, he was firmly addicted to constant growth in revenue.

He financed the growth by paying cash for all major purchases. So you would think that he had extra cash with that sort of growth? Nope.

To cope with the growth he added staff, built up inventory - which created a constant drain on his cash flow.

Sustained Growth Can Create an Imbalance

If you got to know him and heard that he was growing at 30-50% a year you would think he was doing pretty well. Except you could not see the stress he was hiding trying to make payroll and juggling his accounts payables.

Every month the capital structure of his corporation became more and more imbalanced. He was proud that he never needed to go the bank to borrow money - it was false pride.

False? Yes, because he did not know what he did not know. In fact, he should have been paying his banker a visit much earlier or in his case a private investor would have been ideal. Why?

He sold big-ticket items to businesses in the oilfield service sector. The turnover of his inventory was low due to the long sales cycles. Combined with the large purchases he needed to make ($10,000-$60,000/item) every penny of profit was tied up in inventory. Nobody knew it but he would struggle to make payroll every two weeks.

He squeaked by, until the oil industry ground to a halt.

A Little Investment Capital Would Have Gone a Long Way

He ended up with lots of assets that he could not convert into cash when he really needed it to make payroll, rent, and utilities.

If he had diversified his risk by using private investment money to purchase inventory he would have had a lot more cash on hand to keep his accounts payables current and meet payroll.

What We Did To Diversify (and save his bacon)

He sold equipment but did not service what he sold. On-site service was very profitable and great for the cash flow. I helped him set up a service department, hire staff, and get new product lines of consumables that the trade used regardless of the economy.

As a result, the profits from the two-man service department covered the entire payroll of this small company. Customers loved it because they now had an alternative source for on-site service - plus they always paid the service bills on time to make sure that they could get the service they needed when their equipment was down.

What can you do to add a profit center to your business?

Do you service what you sell?

What would happen if you added a service-package to your offerings?

What are your customers asking for that you do not sell?