10. February 2010 00:25
Is Big Always Better?
It is definitely an interesting time period in terms of the economic situation. Some “experts” are saying that we are on the way to recovery while others say we have a long way to go before things get better. At this point in time it is difficult to truly determine where the answer lies. If the last couple of years has taught companies anything it is that, as a company, you must always be able to adapt to many different situations and conditions, and be able to change quickly.
For those of you that were fortunate enough to remember the tremendous growth of the candle market from 1995-2002- you will recall almost any type of candle developed could find a market, and there were some truly remarkable and unique candles sold during this time period. Many candle companies grew with leaps and bounds and started building a fairly substantial infrastructure to support the organization. In some instances, new buildings, new equipment and personnel were added. But then 2001-2002 came and the market started to turn downward and many learned very quickly that it is very difficult to reduce any organization and fixed cost in a very short time period.
If companies or individuals are fortunate to see the next growth of the candle industry in the very near future it is a good time to develop a plan that can not only help support this growth, but also not jeopardize the business if things turn bad quickly. In addition if that next “extra large order” comes knocking on your door, is it right to accept it?
There are very few things more exciting to a business owner than getting that call from a large potential customer that would be equal to your entire production for the next 3, 4 or more months. The natural inclination for many would be to look at what their current best price is and then possibly discount a little more off that price. The next step is normally to do whatever else may be necessary to ensure they get the business. This may be the right thing to do if the circumstances are correct, but in most instances when it is such a big departure from your normal part of business, you need to spend a great deal of time assessing if it right for you. The same logic/calculation applies even if you are making candles in your kitchen/basement and in some instances even more factors need to be considered
While the following will not guarantee that at the end of the transaction it was in your best interest, we hope it will help you make an informed decision:
Is the new account going to require you to purchase more molds, equipment or add personnel? This action will require additional funds to be expended and needs to be calculated into the cost of how long or reasonably long they can commit to you. The longer the commitment they can give you the more you can amortize the new cost. There are very few companies that will guarantee purchases past a fairly short time period. You should try to get as much of a commitment as they are willing to consider. Be sure to get as clear of an understanding as they can give on the arrangement.
If you are a home based business: Is the size of the order going to require you to produce in another place other then your existing location? If so be sure to know all of your cost including your own time in terms of travel, wear and tear on vehicle and if you have to engage child care or other arrangements.
- What type of payment terms are they asking for? If it is 60 days, then you will need to identify what the cost of carrying that type of receivable is. Keep in mind that few vendors these days rarely are more then 30 days. So, what ever you sell them, in the addition 30 days, has to come from somewhere (it is even a great cost if the large customer wants 90 days). Lines of credit, bank loans and other traditional financing all carry cost. Be sure this is part of the equation. Even if the profit is healthy, (which is not always the case if the order is very large) it is still awhile before the amount you make as a profit covers the cost of taking on the new receivable. In addition, you are continually going to be building Inventory which requires you to outlay additional funds. The Inventory number can become deceivingly high with labels, glassware, fragrance, wax and then the need to store the items.
- If the order is an ongoing proposition, what, if any, notice will you receive when they wish to stop purchasing from you? Larger orders will take longer to produce, but your customer will want product in a shorter time period, so you will constantly be building inventory. If they end the arrangement on very short, or no notice, you will be “stuck” with a great deal of inventory.
- What is the financial strength of the customer you will be selling to? The worst outcome for any transaction is the company you start to sell to shuts down soon, or for that matter, anytime you start to sell them. In today's business environment few companies, if any, can survive a large hit on receivables.
- If the customer is already purchasing candles try to find out why they are considering changing suppliers. Getting a good answer on this inquiry is going to be the difficult area to access. The information you are able to secure may help you understand if the situation is then going to be right for you. Maybe their current supplier went out of business, or unwilling to make a shape design they desire, or they did not like the quality of the product.
While larger and new customer transactions are a part of business everywhere, preparing yourself and making sure you have considered all the costs is necessary to make sure it is the best decision for your particular situation.