Should I grow my inventory from profit or is it OK to borrow cash?
- Dave Mix, formerly of Great Outdoors,
JACK BIGEJ: This is a great question. I wish there was one clear answer but unfortunately there’s not. There are only questions for you to ask to determine what is right for you.
The safe route
Buying inventory from profit will give you a slow but steady growth as long as you watch your margins and put the profits back into inventory. This method is more recession-proof as you won’t be buying what you can’t afford or possibly won’t pay back with a slow economy.
Risky, but worth it?
For faster and more risky growth, you can borrow cash to fund inventory. When doing this there are cautions to heed. First of all, when borrowing, always have a strict payback plan so you’re not caught getting deeper and borrowing more, thus paying more interest and causing profitability to go down.
Here are some additional steps:
* When borrowing cash it is important to know what was sold the year before and when it was sold.
* Order in only what will sell for that time of year. The key to using borrowed cash is to gain turns with the inventory thus being able to pay the bank back with interest while still having more to invest.
* An open-to-buy will help keep the inventory at acceptable levels while monitoring the actuals vs. forecast or budget to help determine when the loan can be paid back.
So as you can see, there is no yes or no answer, you must first measure the risk and then the reward and monitor it all along to see if you’re getting where you want to be.
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- Jack Bigej, Al’s
June 2008