Here is a simple economic truth. Fixed overhead continues to eat into your cash month after month. It doesn’t differentiate facile, efficient businesses from slow, disorganized, quality-challenged ones.
If it takes eighteen months to get a new product out the door and into the market, and if a product’s gross margin is ten dollars but the corporate overhead is a million a month, it will take the sale of 67,000 more units to break even than if it were to take only six months to market. If the total annual potential is 100,000 units, the slower cycle to market just cost the company two thirds of a year in the product’s profits. With today’s rapid obsolescence, that could be the entire life cycle of the product itself, lost because of being slow to market.
And profits from the sale of the product create cash for development of the next product. If the time to market is slowed by inefficient development, the risk of a competitive product overtaking yours increases dramatically.
So the truth of the statement is self-evident. Because fixed overhead burns cash, extended development cycles burn more cash, preventing earlier sale of product, to create even more cash. Efficiency in development pays off in less cost and earlier competitive products, often producing greater market share in the process.
Have you considered how to make your operation more efficient as an important way to increase cash flow? Most of us are quick to worry over cutting costs. Some of us worry over how to greatly increase revenues. Few of us worry over how to squeeze more efficiency out of the development cycle or from the organization itself.
That’s your challenge for the day, week, and month.
Published: May 24, 2013
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