Friday, February 25, 2011

Coming to Terms (tradecraft)

An employee was recently surprised to learn an order came in we hadn't paid for yet. Credit terms are pretty much the basis of my business, and how long those terms run will decide how much I buy from a vendor, when I buy it or whether I buy anything at all. New stores are advised to have cash on hand to pay for product purchases. Bite the bullet and pay those COD tags so you never get yourself in trouble. Established stores know that's kind of a suckers bet. You're not only paying a fee on every order, but you're not getting the benefit of the free use of that product before having to pay for it. It's an interest free loan.

The bottom line is I'll order a quantity of product based on the length of terms. The goal is to finish selling that product right as the bill is due. My longest terms are 45 days with Games Workshop, which means I can order deeper than my usual suppliers. If GW can carry me for 45 days, they get the benefit of my more liberal purchasing. I can stock pile new releases about 50% deeper than through my best distributor with 30 day terms. The staff often get nervous when they see me do this, but I have extra time and virtually risk free product. The up-side is I almost always have the new releases in their first 30 days, when customers are more likely to buy them.

In contrast, One of my tertiary suppliers has me on 7 day terms, which means I don't buy anything from them that I can't move in a week. I only buy sure things and exclusives from them. They are a good distributor with a wide selection, but their competitors have 30 day terms or accept American Express, the holy grail of purchasing (terms plus cash back). They have won on product availability, have average customer service, but have failed on price, in this case financing. Moving beyond those 7 day terms is onerous, so I just shop elsewhere. Imagine having great credit and getting a letter from a bank offering you a secured credit card, and then after you've proven yourself, a card with a $100 credit limit. Wouldn't you shred that letter? It's like that.

Most terms are somewhere in between those two extremes or via credit card, my preferred method of payment. Credit cards are a bad bet for distributors. Distributors start with a 10% gross margin, so to pay 1.5-2% to process my credit card is a massive hit. I don't blame them for not accepting them. Manufacturers selling direct are best suited for that, and it probably means their accounting staff can be smaller. The card goes through or it doesn't. No chasing deadbeats and late payers.

On the down side, credit cards are a bit unpredictable, since your terms vary depending on the closing date, from between 25 and 45 days. Believe me, I'm well aware of that closing date and will often wait patiently for the magic day to hit so I can place a big order and get those 45 day terms. Likewise I cringe whenever my Wizards of the Coast new Magic release order goes out on the day before! I just missed 20 days of free money. The big upside is either cash back or rewards. I'll be going to the Gama Trade Show next month and my room is paid for using my rewards card.

This method does require discipline. We're having a very good month now, but I'm a little concerned since we'll be paying the invoices from those games next month, when the bills are due and the sales are slower. This tests my "open to buy" or purchase budget. If I bought wisely, and I think I did, I should have the money sitting in my account now for next months bills. Occasionally, cash flow needs some massaging with other methods, like paying credit cards to vendors who prefer terms, or using savings for a few days until big sales days. When the stock market tanked a couple years ago, spooked customers stopped shopping for about six weeks, which caused our finances to suffer for several months while we caught up with our bills. If it had happened in the spring instead of the fall, we might have been in more serious trouble without holiday sales to get us back on track.

You can get yourself in trouble when you're rolling in dough and the bills haven't been paid. Flush with cash, you begin noticing all the things that need a fixin." You consider distributions to the owner and raises for the employees. In retail, it's dangerous when you're not selling, but far more dangerous when you are.

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