The Counterintuitive Cash Flow Strategy That Works
Living on credit has never been Laura Zander’s style. In 2001, having lost a job as a software engineer with a dot-com, Zander moved to Truckee, California, and set about trying to make a living in a town of 14,000 people. She turned out to be a natural bootstrapper. Using $30,000 of her savings, she opened the first Jimmy Beans Wool yarn shop and coffeehouse in 2002.
Eleven years later, the yarn shop (minus the coffee, and now located in Reno, Nevada) and website bring in a combined $8 million in annual sales and employ 45 people. The company has been named to the Inc. 5000 four times. Below, Zander explains why she always pays cash for inventory.
When we used our modest life savings to open a yarn shop and website, we had a very small amount of
inventory. We knew we needed more. Our vendors were kind enough to extend terms to us, and since “terms” seemed so much more benign than a loan, we took the bait. I would get to buy a bunch of inventory at the beginning of the season, and I wouldn’t have to pay for it until after it sold. Fantastic!
Not so fast. If only it were so simple. My orders rarely arrived in one shipment. Instead, shipments were spread out over months. Naturally, I’d reorder some of the items that were selling well. Soon, I was receiving multiple invoices on a weekly basis, all with different due dates.
I had a hard time getting my arms around how much I was ordering and how often the inventory was churning. I did a horrible job keeping track of which bills were due when. I could have hired a bookkeeper, but I was trying to spend money on something that could help the business grow-inventory. We never ran out of cash, so I didn’t worry about it.
Outch. Then the slow season hit, and we had a huge tax bill. All of a sudden, I had tons of inventory, no sales, and bills due weekly for inventory I had bought during the busy season, when I actually had cash.
The answer. I quickly adopted two rules: If I can’t pay cash for it, I won’t buy it. And the inventory will
grow at the same rate as the business. I realize not all businesses can operate this way, and it’s one reason the crafting business is the best in the world. People knit and sew all year long, and our inventory isn’t perishable.
Now, we live in the real world. We start with an educated guess as to how much we’ll sell in the next month, and we buy that much inventory. No more, no less. Then we monitor our projections and our sales on a daily basis. If our projections are off, we adjust our spending. The worst that can happen is that we buy too much in one month. We compensate by cutting back the next month.
Simple, easy. Then, we pay all of our bills with a credit card that gives us 2 percent cash back. These are the same terms that some of our vendors would give us, but because we put everything on one card, there is only one bill to be paid each month. We no longer have to juggle invoices, write checks, and manage the bookkeeping that goes along with all that.
Instead of buying and receiving products as soon as they are released from manufacturers, we spread
new offerings out over all 12 months of the year. From a marketing perspective, this lets us be authentically excited about new products. We always have something fresh, and the reality is that our customers are buying crafting supplies each month. They don’t just buy stuff twice a year, when the new products are released.
Lesson learned. We would rather have extra cash than extra inventory. We can always make the decision to strategically invest the cash in inventory, but we will never be able to make those decisions if we don’t rein in our spending on the day-to-day stuff.
Bonus. We’re no longer scared to answer the phone when the accountant calls.