Here’s how Expansion Drains Cash Even as Revenue Grows
Well, it should be obvious that sales going up is supposed to feel like winning. Every business out there wants more orders, more customers, more momentum, well, more everything. Plus, when it comes to expanding the business, well, you clearly must have had some pretty decent financial habits to be able to make the investment […]
Well, it should be obvious that sales going up is supposed to feel like winning. Every business out there wants more orders, more customers, more momentum, well, more everything. Plus, when it comes to expanding the business, well, you clearly must have had some pretty decent financial habits to be able to make the investment to expand said business, right?
Now, sure, that all makes absolutely total sense here. But at the same time, money within your business could still very well feel tight, like really tight. But what gives? Shouldn’t expansion mean more money? More breathing room? Well, not always, and here’s why.
More Places to Sell Means More Money Held Back
Yep, it’s actually as straightforward as this, honestly. So, expanding into new regions sounds simple on paper. Like, it really truly does because it should be as easy as just turning on shipping, launching ads, watching the orders roll in, done. To a degree, it could technically be this easy, but a good chunk of the time, it’s actually not.
Well, getting specific here, the financial side gets more complicated fast, because more locations can mean more tax admin, more fees, and more money that isn’t really yours sitting in the business account. There’s a lot of obligations you need to think about here, sometimes, that includes having to put money aside and needing to schedule to pay that out too. For example, if you ship to the US, well, each state has its own taxes; Florida sales tax isn’t the same as another state, like California or South Carolina, but wherever that customer is coming from, that’s ordering from you, well you owe taxes now.
Inventory Starts Eating Cash
Okay, but in what way, though? Well, just understand here that this is the big one. Specifically, growth usually requires inventory, and inventory requires cash up front. Even if a supplier is reliable, restocking ahead of demand ties money up in products that aren’t sold yet. And if a store is expanding into new markets, it’s common to order more than usual just to avoid running out.
And you better believe that’s the tip of the iceberg, because it’s about to get even trickier. So, inventory isn’t just the product cost; there’s more that goes into this, like shipping, storage, packaging, and sometimes the cost of mistakes. Plus, as you might know, over-ordering for a new market can lead to dead stock that has to be discounted later, which makes the cash flow problem worse. But again, this doesn’t always happen, sometimes expansion isn’t on this scale either.
Sometimes, the Advertising Costs More
It’s hard to say, hence why “sometimes”. But for most businesses, it makes sense that ads are often the first lever pulled when expanding. After all, there’s more regions, more audiences, so of course there will be more spending. And yeah, sure, sometimes it works beautifully. But ads don’t always scale smoothly, especially if you need to localise them.
Actually, that’s the problem here, because new markets require testing, and testing costs money. And if you’re already using ads from the same company, like Meta, for example, you rarely get discounts for expanding to new markets.