As one of our recurring features, we want to highlight our business technical support. That's why we will be publishing intermittent business advice from our Regional Director, Corey Hageman. Some of these pieces will be long and some will be short. Sometimes the topic will be general and sometimes it will be industry- and Montana-specific. Take a look for yourself!
HOW DOES YOUR INVENTORY AFFECT YOUR BUDGET?
Let's create some hypothetical people for this conversation: Jane & Joe.
Jane & Joe run a bath & beauty shop on the main street near you. They have been successful for their first two years of operations, so they decide they can be more aggressive in their business strategy. They buy several pallets of a new scented candle at bulk pricing to sell at a higher profit margin, only to find that they're selling at a fraction of the speed of the last scented candle. They can't afford to continue buying more of that last scented candle until enough of the new candles have sold due to the upfront purchase amount they absorbed to receive the deal.
Where did they go wrong? They spent too much, too soon.
Those scented candles are not just scented candles. They are monetary assets that can affect the long-term viability of the business. By tying up liquid capital (their spending money) in assets with little to no demand (the new candles), Joe and Jane just reduced their ability to expand and capitalize on new and more profitable opportunities in the market. If a new scented candle comes along that is all the rage, they won't be able to afford to buy them because they are still trying to get rid of the old scented candles that nobody wanted!
When purchasing products (even at an extremely good price) you need to consider the possible long-term ramifications of that purchase. If you buy a bunch of product A and it doesn't sell, will you be able to buy your usual amount of product B in six months' time? In other words, are you saving pennies to lose dollars?
Whether you're selling candles, soap, or something else, you need to look at your inventory as cold hard cash sitting on the shelves that is unavailable to you until the product is sold. Your money doesn't just magically disappear from your budget once it is used for a product. You wouldn't be putting a price tag on your products if that was the case!
Let’s see how Jill & Joe’s investment plays out for them.
1. Jane & Joe sell candles for $2 in their shop and they sell 1,000 per month. Let’s say that the current cost is $1 per candle and they can buy as needed in cases of 100. That makes profits on candles $1,000/month (with 0 carryover inventory).
2. The bulk deal they purchase is for 20,000 candles @ $0.25 per candle for a total investment of $5,000. On paper, this looks great! They are getting four times the candles at a quarter of the cost, which adds up to an extra $0.75 profit per candle sold…
3. … however, sales drop on the new candles from $1,000/month to $250/month for a monthly profit of $438. It will take 11.5 months to pay off the initial investment at that rate.
4. Over time, the difference becomes staggering. $438 a month for a sales cycle of 80 months leaves Jane & Joe with a profit of $35,040. Before this investment, when they had been selling 1,000 candles/month, they were making $80,000 in 80 months!
Their candle revenue was cut in half. Bear in mind that we haven’t even taken theft, damage, discounts, and other factors into account. All told, it could take Jill & Joe over 80 months to recoup their original investment. In the meantime, somebody else has probably started selling a more popular kind of candle.
What are you doing today to track your assets? Do you know how your assets affect each other? What is selling well and what isn't selling well? Are you testing potential new products before you commit to them? If you have a product that isn't selling, how are you going to get rid of it while cutting the loss as much as possible?
Contact me at corey@sweetgrassdevelopment.org if you want to talk more about this.