The Importance of Not Overbuying Inventory
Usually when a client comes to us and wants to grow their business the first thing on their mind is “How can I source faster?” or “How can I source at a larger scale?” However, we have found that often times when business are growing a good first place to start to allow money to flow better in the business is to make sure that the inventory turn rate is healthy and that there is not a lot of stale inventory tying up capital.
Now, this isn’t nearly as fun to talk about as the newest trends in Private Label or “Hot Niches” but we have found it very valuable information not only for our clients. But for ourselves as well.
Stale Inventory Costs You More Than You Think!
If you are an Amazon seller than you probably know that any inventory you hold longer than six months gets charged a whopping $11-$22 a square foot in August and February. So there is a set cost to hold your inventory- even if it isn’t in your home.
If you store inventory where you live or in your warehouse- there is a cost to the space it takes up. Plus, there is the mental drain you get from seeing that inventory day after day. Knowing it will likely be there for months to come.
However, stale inventory costs you the most in lost opportunity…
When you have a backlog of stale inventory you tend to have capital- that could be used to buy items that you could turn several times. This compounds the amount that stale inventory costs you each month.
For example:
You have 100 small widgets that cost you $10 that you expect to profit an incredible $30 each for a total of $3000 profit. It takes you 6 months to sell through the widgets so no long term storage fees are accrued.
Your profit about $3000 off of your $1000 investment. You now have $4000 (original investment+$1000)
Instead you buy only twenty of those small widgets. You sell those in just over a month for a profit of $600.
You take the remanding $800 ($1000 investment- $200 in small widgets) and purchase in several other widgets that only give you a profit of 50%. You only buy a month or less of inventory. At the end of the first month you have an additional $400 in profit.
You now have doubled your money (profits + your original investment) ($600+$400+ $1000). You only find items with a 50% return for the reaming 5 months.
Month 2- (2000+1000)= $3000
Month 3 – (3000+1500)=$4500
Month 4 – (4500+2250)=$6750
Month 5 – (6750+3375)=$10125
Month 6 (10,125+5062=$15,187
At the end of the 6 months you now have $15,187. That is more than $11,000 more than if you had bought all of the higher profit widgets.
Now this doesn’t take into account that there are some additional expenses with turn inventory more times (time to source, prep, etc.). However, the point is to demonstrate that there is a cost for lost opportunity in over buying. Even if it is at a higher margin.
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