Why We Pay Cash for Inventory. Yes, Cash.
When we used our modest life savings to open our yarn shop in 2002, we had a very small amount of inventory. We knew that in order to grow the business, we needed to increase the amount of yarn that we carried. Our plan was to reinvest all of the profits back into the business for a few years, until the business was substantial enough to grow and produce an income. Simple, right?
Knowing that we were self-funded and in growth mode, our vendors were kind enough to extend terms to us… and since “terms” sounded so much more benign than a “loan,” I jumped at the chance. After all, who wouldn’t want to buy a bunch of inventory at the beginning of the season, and then pay for it after it was sold? Fantastic! But it wasn’t so simple:
- The inventory I ordered at the beginning of the season rarely arrived all in one shipment. Instead, it was spread out over months. Naturally, I’d reorder some of the items that were selling like hotcakes. That meant that I was receiving multiple 30/60/90 invoices on a weekly basis, all with different due dates.
- As time went on, I was spending more and more time doing things to grow the business, and did a horrible job trying to keep track of which bill was due when. It was a nightmare. I could have hired a bookkeeper, but instead I was trying to spend money on something that could grow the business--inventory.
Because I was paying for inventory that I received months prior, and because I didn’t spend the time to micromanage the invoices, I had a hard time getting my arms around how much I was ordering and how often the inventory was turning. But we were at the top of the yarn bubble, sales were at an all-time high, and we never ran out of cash, so I didn’t worry about it. And then the slow season hit, and we had a huge tax bill. All of the sudden I had tons of inventory in the shop, no sales, and weekly bills for stuff I had bought during the busy season, when I actually had cash. Sigh.
From here on out, I’d follow two self-imposed rules:
- If I can’t pay cash for it, I won’t buy it.
- The inventory will grow at the same rate as the business.
Here’s how we’ve stuck to those rules, and why it has worked for us:
Note: I fully realize that not all retail businesses can operate this way because of many factors: seasonality, delivery time, perishability, etc… that’s why the crafting business is the best business in the world! It’s not perishable and people knit and sew all year long.
1. We now make an educated guess as to how much we think we’ll sell in the following month, and purchase only enough inventory to replace what we’ve sold. Our industry uses so-called keystone pricing, meaning that retail prices are twice the wholesale ones. If we think we’re going to sell $1,000, we give ourselves $500 to spend.
2. We monitor our projections on a daily basis.
3. If our projections are off, we adjust our spending on the fly. The worst that can happen is that we end up spending too much one month, but can compensate by cutting back the amount we purchase following month.
4. By paying our bills with our Amex Plum card, we get 2% cash back. These are the same terms as some of our vendors would give us, but in this case there is only one bill to be paid each month. We can forget about juggling invoices, writing checks, and managing the bookkeeping that goes along with all of the above. This saves us soooo much time and money that we can instead use to grow the business!
5. Instead of buying and receiving products the instant they are released from the manufacturer, we spread new products out over all 12 months of the year. From a marketing perspective, this gives us the opportunity to authentically be excited about new products that come through the door. We always have something fresh, and the reality is that our customers are buying new knitting and sewing supplies every single month - they don’t just buy stuff twice a year, when the new products are released.
The lesson in all of this: We would rather have extra cash than extra inventory. We can always make the decision to strategically invest the cash into inventory (for example, when we decided to expand into fabric and quilting, or when we wanted to test out a new concept like our Yarn Bouquets), but we will never be able to make those strategic decisions if we don’t rein in our spending on the day-to-day stuff. Bonus: Now we aren’t scared to answer the phone when the accountant calls.
LAURA ZANDER | Columnist | Founder, Jimmy Bean's Wool
Laura Zander is co-founder and co-owner of Jimmy Beans Wool, a market leading yarn and fabric retailer that?s earned a spot on the Inc. 5000 for the last four years in a row (and counting). She and her husband, Doug, were both dot-com software engineers in Silicon Valley before moving to the Lake Tahoe area and opening their shop in 2002.