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IdeaXchange

Brands must consider the cost of potential growth opportunities

elliot begoun ideaxchange
Applying the 'locked box analysis' helps entrepreneurs understand the tradeoffs involved in seizing a shot at growth.

As entrepreneurs, growth is a tempting mistress. It draws us in and causes us to say yes to opportunities when we’re actually unsure whether they are the best fit. Our industry expects growth, investors want to see growth and fellow entrepreneurs benchmark against growth.

And yes, building a successful business requires growth—but not at any cost. Growth for the sake of growth is insidious. Falling prey to the tug of the topline can strip a company of its most important commodity: cash.

I don’t want to sound as if I am anti-growth. Nor do I want to dissuade entrepreneurs from capitalizing on smart growth opportunities. However, I am going to ask you to look at it differently. If you read my columns regularly, you won’t be the least bit surprised by my request.

I want to encourage you to apply the “locked box analysis.”

Let me explain. In this business, there aren’t simply right or wrong, black or white choices. Instead, as an entrepreneur, you are fed a constant stream of tradeoffs, just like Isaac Newton's third law of motion: for every action, there is an equal and opposite reaction. By applying the locked box analysis, you can better understand the tradeoffs involved with a potential growth opportunity.

Whenever you say yes to a growth opportunity, you make a cash commitment for inventory, receivables, free-fills, trade, merchandising and more. You also pledge your team’s bandwidth to support the new initiative. With these commitments, you place that cash and bandwidth in a box, seal it and put it on a shelf out of reach. You can’t use anything inside that box to support other opportunities or business needs. Understanding this reality enables better decision-making.

Let me illustrate. Say a brand has an opportunity to go into 500 new stores. What will this commitment require? The brand will have to do a production run. The co-manufacturer requires a 50% deposit to schedule a run. We’ll call that $100,000, and it goes into the box. The products are six months away from being on the shelf, yet that money is no longer available to the business.

As the brand gets closer to launch, they produce and pay for the balance for the run, placing another $100,000 into the box. They finally get the purchase order from the distributor but know that most will go toward the free-fill. They engage a merchandising team for $80,000, which also goes into the box. They ask their social media and sales teams to be laser-focused to ensure a successful outcome. That available bandwidth also goes into the box.

Quick math shows us that the brand now has $280,000 locked in a box that they can’t access for any other business need. They have also placed a significant amount of their social media and sales teams’ productivity in that same box.

As a business leader, you need to recognize what you are putting into the box with each new opportunity you consider. Then ask the tough questions. In the aforementioned case, how would locking that $280,000 away for a significant period of time impact the many other important things that need to be done to support the business? Would consuming that much of your team’s bandwidth affect other critical initiatives?

Looking at each opportunity in this manner will help you better grasp both sides of the equation. It might cement your decision to move forward, or it could justify the need to pass or delay. Without the locked box analysis, growth can be too tempting—and it could lead you down the road to ruin.

Elliot Begoun is a 30-year industry veteran, author, podcast host, founder of TIG Brands and champion of Tardigrades. TIG Brands supports a community of entrepreneurs interested in building nimble, capital-efficient, resilient brands that become Tardigrades, not Unicorns. 

Have some big ideas or thoughts to share related to the natural products industry? We’d love to hear and publish your opinions in the newhope.com IdeaXchange. Check out our submission guidelines.

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