Friday, December 16, 2016

Invest in Yourself (Tradecraft)

We borrowed tens of thousands of dollars from individuals to partially finance our new Game Center. One conversation I had several time with other store owners was whether it was worth giving us a loan versus investing in themselves. We offered a pretty good interest rate, but invariably they would go back, crunch some numbers, and realize they could make a lot more money investing in themselves. I wholeheartedly agreed. I didn't get those loans.

How does that work? Your retail operation is an economic engine and increasing the size of that operation naturally increases its performance. In the car world, there's a saying: There's no replacement for displacement. There's no better way to get more power than going bigger, and that's true of inventory as well. More inventory means more profit and it's often just fine tuning to maximize that profit.

Even poor inventory performance has return on investment far greater than most loans. lets run some numbers using a single turn. I drop product at one turn. One turn inventory is dead to me.  However, one turn is only bad relative to higher turns. Here's how that works.

Inventory value: $10,000
MSRP of $10,000: $18,181 (using a 55% cost of goods)
Sales at 1 Turn over a Year: $18,181 (you sold that inventory an average of once over a year)
Net Profit: $909-1,818 (5-10% is about average in this trade)

So what annual interest rate would I need to pay a retailer to match the performance of his bad inventory? In other words, you may be out of ideas on what to buy as a retailer, but just plowing that money into junk will get you at least that one turn.

Using an online loan calculator, at the bottom end, a $909 profit is the interest paid on a $16.4% loan. Getting to $1,818, the top end of your inventory net profit, would mean I would have to entice you away with a 32% loan. This is also why small business owners receive offers for insanely high interest loans. You look at a 32% loan and think, well, that's only one turn. I could do far better than that. Sounds like trouble.

So you should definitely plow all your money back into your business. Well, except for the fact that your $10,000 of inventory is worth somewhere between $500 and $1000 when you attempt to get out of your business. Anyone who spends a lot of money on their cars knows it's a one way trip. The money going into a car to customize it, will never be a significant part of the resale value of the car. The same is true with your small business.

Short and mid term thinking means there's really no better return than investing in yourself. Long term thinking? You better have a clear exit strategy, which means diversification into the real world for when you're done with your labor. That's the dilemma for most small business owners, as 40% retire with no savings. Only 10% have a 401K or similar vehicle.  Here is where I would pitch you a loan, but honestly, I want nothing more than to pay off the ones I have now ... using inventory turns.

Generic inventory graphic to see if Facebook will let me promote this post

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