Expand Your Brand: How to Fund Your Next Product

I suspect that if you've started to see success with your first product, you are already starting to think about your second. There are many factors to consider before you begin to expand your brand.

One, of course, is being able to afford the launch of that product. From a financial perspective, I suggest that you begin planning for that next product right away. If you are selling your first product at a good gross margin, usually around 30% or more, and you are keeping your advertising and other operating expenses in check, then you should have cash to set aside for product development.

Profit First Strategies Help You Expand Your Brand

The Profit First cash flow strategy can be expanded upon to ensure that you’re planning for growth in your business and able to expand your brand appropriately.

Some of our Profit First clients plan to fund the next product by setting aside more inventory funds than are needed to simply replenish their existing product. They add 10-15% above the replenishment rates to grow the inventory bank account so that funds are available when they are ready to begin the development of their new product.

This strategy can work well if you keep track of those dollars and the growing amount you are earmarking for this purpose with each allocation. You can do this with a simple spreadsheet.

One downside to this type of approach is that it's easy to watch that bank balance grow and then when another use comes up, you reach into that account for the funds. In a flash, that money is spent. Only later do you realize that you did not reserve the funds as originally planned.

One common trap is inadvertently funding increased inventory buys of your existing products because of expected future demand for your busy season. It's great to set aside an additional percentage for sales growth, but just be clear that is a separate strategy than the funds you are earmarking for a new product.

Create a Product Development Bank Account

A simple strategy that we recommend to clients to resolve this issue is to create a Product Development bank account. It can be a savings or a checking account. After you allocate to inventory in the typical Profit First manner, you'll then allocate to your profit, owner pay, taxes, operating expenses, and product development bank accounts

You can do a profit assessment on your business and then follow those percentages. The amount you want to raise for product development should be funded by a reduction in operating expenses. Don't cut your pay, profits, or taxes to fund product development. It is clearly an operating expense.

As you watch the product development bank account grow, you can simultaneously begin researching and planning your next product. However, make sure you don’t take your eye off the ball with your first product. As you create more complexity in your business, it’s easy for something to get lost in the shuffle.

If you are concerned that it’s taking too long to save up the funds for the second product, this is a red flag telling you that your margins may be slim, and your first product may not be a cash cow. Carefully consider your options in this situation. You may be able to increase prices or cut costs associated with manufacturing or advertising. Or maybe you should cut your losses and not reorder that product as your supply is depleted.

Pay Yourself First

A common question that I get from clients and webinar attendees is, “Why can’t I just not pay myself in order to grow my business faster?” There are a couple of reasons why this is not a good idea.

First, you need to ensure that you create a business model that will pay you, even though you may still be working your day job. Even if you are willing to invest “sweat equity” in your business, your replacement, should you get “hit by a bus,” will not.

Successful businesses build a cost structure that they can sustain from the beginning.

Second, you will be learning a lot through these first few products, and oftentimes, a surplus of cash for a new business creates waste and inefficiencies. Take a little time to go slow and get it right. Then when you go fast later it will be quick and profitable.

Keep Debt in its Place

Finally, another common question is, “Can’t I borrow the money so I can scale quicker?” Debt can have a place in business, but often it’s misused. If you haven’t tested out your business model, additional funds may obscure an issue with pricing or sourcing. If those issues exist, then the gross margin may be too low to fund the interest on the loan.

It’s exciting as an entrepreneur to plan and dream about your businesses. Plans and dreams are really where it all starts. By taking the time to consider the financial implications before you expand your brand, you will have a better chance to make those dreams come true.

If you'd like to embark on the full Profit First Cash Flow Management program, check out my book, Profit First for Ecommerce Sellers.