Columnists, Thom Finn, V4I6

Forecasting Demand

Wise shed builders are working less in their businesses and more on their businesses. This time of year, that means some deep thought focused on what they should produce for next year. 

When asked for advice, I answer a question with a question, which can be maddening. It’s one of the few times when I must say, “It depends.” The answer depends on how much cash reserve you have built for the winter. If you are worried about cash, then avoid overproduction. But if you reached the needed core capital target, then build wisely.

The closest thing I have to children are my clients, and I worry, nag, scold, and encourage them more than I should (especially the worry). This time of year, I worry about two things for my shed clients: preparing for taxes and cash flow over the winter.

Early in my first life as an entrepreneur, I experienced the pain of running out of cash. It was Valentine’s Day in the early 1990s and I stopped to get flowers for my wife. I had no cash, so I used my credit card and it was declined—for $7.88. I left the flowers on the counter, walked back to my car, threw up in their parking lot, and then cried. I guess I made some kind of vow that if I made it through until April (which seemed an eternity away), I would mend my ways and never ever create cash flow problems again. 

Today, I talk to shed manufacturers who either A) need to conserve the life-giving cash over winter, or B) sit atop a mountain of funds and can make decisions solely on profitability, with no worry about the flow of cash. 

The majority of builders are, at best, one bad month away from serious cash flow problems. My phobia of cash flow, which is not as great as my fear of debt, partially explains my obsession with winter cash flow now. If a business is under three years old, is rapidly expanding, or has cash flow pain measured by at least two or more times in the month where you do not have enough to pay all the bills and make headway on your debt (including that insidious line of credit), then I would diagnose cash flow problems.  

Despite this, many of these builders behave completely opposite to how they should when it comes to conserving cash and production. Instead of reducing anything that will use cash over the winter time (if nothing more than to pay the governments its due), they seem to build and build and build.

Let’s say in order to keep producing, I will need $100 for labor costs due as payroll every two weeks and $600 for materials. That’s $700 that I will spend in December and not get the cash back until March or April. Unless I have cash coming in from an RTO savior, or am sitting on a heap of cash, I just shot myself in the foot. 

Yes, it will hurt next spring when I have no inventory to sell right away and my lead time jumps, but when it comes to the pain of negative cash flow or a long lead time, I’ll take the slight discomfort of a long lead time.   

 “I need to keep the guys busy” is the most common reason I hear for the lack of adjustment. I do understand that and with the tight labor market, I encourage everyone to keep the workers they do have. Surely there is some difference between operating at full production, breaking record after record, and slowing down somewhat. 

Reducing or eliminating the overtime (or another 50% of labor) is a logical first choice. Instead of a few days off for hunting, give the team the full week. Give an extra day for weddings. Close two weeks over Christmas instead of one. If you can nicely reduce what you pay out for labor, the material costs will drop right behind it. If there is no one in the shop to build it, then the raw materials won’t be consumed as fast. 

I traced the term “overproduction” back to 1883, but I believe it really gained attention in the 1960s when Japan was formulating the tenants of lean manufacturing and identified the top seven wastes. I once had a professor who put overproduction at the top of the list of seven because all other waste stemmed from it. 

In manufacturing, overproduction is defined as making products in too great a quantity before it’s actually needed, thus leading to excessive inventory. I agree that it leads all seven dangers of waste, because it always leads to tight or negative cash flow. A solution, sometimes called lean manufacturing, requires you to make just what the customer wants, when they want it. Creating shed after shed after shed is not lean. In fact, some would call it fat, a word I personally find insulting. 

Overproduction can create costs in other areas, like interest paid on the cost of excess stock that you are holding, storage costs, missed opportunity costs, and disposal costs of unsold goods. If you are concerned about running out of cash over the next few months, then follow the above advice on overproduction. 

But, if your days of cash flow worry are behind you, then you probably have weathered those first few years of cash flow and have wisely conserved—otherwise you wouldn’t be in business today. It seems that those who can preserve cash while maintaining my recommended profit percentage for shed builders have their business blessings multiplied in their future years. These are the companies that do have enough capital to continue this building and manufacturing. The wisest question this group can ask is “what to build.”  

Forecasting future demand would be much easier if the future was guaranteed. I tell clients to the best of my knowledge to plan on another two years of this summer economy. I explain the economy like seasons, and I predict another 24 months of good times. But, if you ask my wife, she will point out that I am wrong on an hourly basis, so follow that advice at your own risk.  

Even those who have survived the infant stage of business, or the ill business epidemics like cash flow, know that accurate forecasting helps with purchasing, labor management, and production, as well as giving marketing, and thus sales, a jump start on what we plan to build.        

Large computer software programs, referred to as ERPs, are supposed to have a function that will forecast for a large manufacturer, but I have seen disastrous results if these are relied on solely. Instead I recommend checking a few factors independently in order to ensure you make an educated guess. 

Start with sales history, both by location and, more importantly, by product. As consumer tastes go, the shed industry is not as volatile from one year to the next as, say, women’s fashions. What was a popular seller last year, will probably sell well again. However, it could also be wise to start on the development of something new for next year. My best guess would be a focus on the ability to customize a package all at once rather than selecting from a list of choices like when ordering a pizza.


The second place to check on when predicting production would be to talk with suppliers. What will the cost of your top three materials be? These guys know better than any of us if a disruption in the Shenzhen Stock Exchange will affect us. 

The third and final place I recommend is to check out micro or local economic changes. A town with near full employment should deliver a heathier demand than in years past. This could mean that you plan on offering less economy-based buildings than last year. On the other hand, if your dealers and sales lots are reporting back that sheds are considered a commodity and the cheapest price wins, then your production would swing back the other way.Although moneyed builders will probably sleep better this winter than the have-nots, they should continue to be watchful for overproduction. Any shed produced took material and labor. The longer it sits without it being purchased means the longer you don’t get the cash back for it.

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