Chairman and CEO of Perry Ellis International Inc.
The apparel business is very capital intensive. You need to have capital to buy inventory and to support receivables. To get the capital, you can give up equity -- which I never like to do -- or you can borrow. I was borrowing all the time. I wanted to grow 15% a year, so I needed to buy 15% more inventory.
In auto parts or hardware, if you don't sell your inventory right away, you can sell it later on and not suffer a loss. But in apparel there are fashion seasons. If you don't sell your inventory each season, you take a loss on it. You have to plan your buying carefully so there is nothing left over. I didn't do that.
When the recession of the late 1970s began, our sales were going down, but I didn't decrease or even flatten the amount of inventory I was buying. Instead I kept buying at a rate to support my growth goal. Of course, I should have planned down my inventory. But you hate doing that -- it's just not in the psyche of the entrepreneur to plan down. Entrepreneurs feel that they can get around anything, even a recession.
Well, that was a big lesson. I had to keep borrowing to cover myself. Interest rates went up rapidly. In time, I owed so much money to the bank that the company's net worth was zero -- I owed as much as I had in inventory and receivables. The bank kept me going only because they had collateral in another company of mine, and they trusted my honesty and ability to overcome the situation.
I cut expenses and got rid of some unprofitable lines that we carried just for turnover. Eventually, interest rates dropped and we recovered. I learned the value of reacting early to changes in the economy, even if it's at the expense of losing sales. That's never easy for anentrepreneur. But the reality is that it's better to be cautious during a tough economy. That way you'll be stronger when it's over. --Written with Ilan Mochari
The Quotable Entrepreneur
"You know your company has gotten too big when you go into the ladies' room and you don't recognize the shoes of the girl in the next stall."
--Paula Jagemann, president and CEO of ECI 2, a three-year-old, 250-employee e-commerce-services company in Vienna, Va.
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