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Inventory financing is a severe pain in the ass for small businesses. It makes moving up to the next level incredibly difficult. Math example: You sell someth

by manv1 4y ago

Inventory financing is a severe pain in the ass for small businesses. It makes moving up to the next level incredibly difficult. Math example: You sell something for $20, and it costs you $5. You have free shipping, which costs you $3. Shop and CC fees are maybe $2, so you're netting $10. Then taxes means you net $6. So if you sell 10,000 units you've netted $60k. But to make that $60k you need to spend $50k up front to buy the inventory, and maybe $2k more to ship the inventory to you. Then you need a place to put it, so maybe $1k/month. So when you need to order your next batch of inventory you need, say, $52k. You haven't made that much yet, because your inventory has a 2 month lead time. So you use money from the 60k in "profit" to buy inventory, leaving you no profit. At that point you haven't made anything. It looks like you're making money, but you aren't. Maybe you dip into your tax reserve fund to buy that inventory, but the fact is that you probably haven't paid yourself much, if anything. This is the brutal reality of small business math.

jacquesm 4y ago
Depending on the industry 30 or 60 days net may help or hinder you even further.
- szundi 4y ago
  In my country 120 days is pretty common for Metro or Tesco.
maritimus_bear 4y ago
[dead]
nlh 4y ago
The realities are brutal indeed BUT we should all be using the right terminology here: This is all about cashflow. When you say: > So you use money from the 60k in "profit" to buy inventory, leaving you no profit. That is incorrect. The business still has made a $60k profit, but they have no CASH since they had to redeploy that cash toward additional inventory (which leads to additional profits). > At that point you haven't made anything. It looks like you're making money, but you aren't. Again, sorry: You have made $60k in profits, but you're short on cash. Your business is making money -- you now have the next batch of inventory paid for and you were able to afford that with the profits from the previous batch. Those are real assets, But your business is indeed short on cash -- this is where revolving credit lines and similar financings come into play (which carry a cost and complexity of their own). It's definitely a challenge!
- Waterluvian 4y ago
  I imagine there’s reasonably priced financial products like business lines of credit, especially if you’re demonstrating a revenue stream and your only issue is cash flow. Ie. You’re not borrowing money for big capex things like renovating a restaurant. Of course nothing is guaranteed. That second batch of coffee may not sell.
  - ABCLAW 4y ago
    >I imagine there’s reasonably priced financial products like business lines of credit So much so that there's names for various ways of cutting up the receivables risk. For example: https://www.investopedia.com/terms/f/factor.asp https://www.investopedia.com/terms/f/factor.asp
  - lazide 4y ago
    For a long time, those have been nearly free and easy to get. The temptation then is to continue doing more and more marginal business models, because they work and the competition does the same. Those are getting harder to find and more expensive. Lack of those at the right time is what causes the liquidity traps the Fed is always talking about, when it happens at large scale. Little risk of that happening now it seems, and a lot more ‘reaping’ of marginal business is likely before the Fed changes direction.
- lazide 4y ago
  Notably, with cost of money rising, I’d expect a non trivial percentage of existing business models and businesses to no longer be viable because of this.
tinus_hn 4y ago
I don’t think it is quite normal to start out with orders that make you $60000 profit.
gamblor956 4y ago
The "math" is wrong. You've described cash flow, not profit. You still have a profit of $60k. That you choose to reinvest that profit in acquiring additional inventory does not affect the profit calculation on the inventory already sold.
- lazide 4y ago
  Only if you actually sell the product at that price, and nothing goes wrong. But yes, they’re talking cashflow and liquidity issues.
MuffinFlavored 4y ago
> So you use money from the 60k in "profit" to buy inventory, leaving you no profit. Not exactly related but I see a lot of comments online from people usually saying "wow, this business is made up of a bunch of greedy profiteers gouging customers for doing _____ behavior" when in reality... aren't most businesses at most running at 10-20% net profit margin? Small, medium, and large?
- lazide 4y ago
  Yup. It’s easy to point fingers though, if you don’t see the reality on the ground or understand the risks.
michaelt 4y ago
I'm very confused by your numbers here. Are you sure you haven't counted something twice? Let's say you're moving 10,000 units per month. You buy the stock for $50,000, get it delivered for $2,000 and store it for $1,000 - so you had to get an investment of $53,000 to set the business up. You sell the stock for $200,000. Making those sales, you spend $30,000 on shipping, $20,000 on credit card fees, and $40,000 on sales tax (assuming your "taxes means you net $6" means your country has a 20% sales tax which you included in your $20 selling price) At the end of the month you owe your investors $53,000 and you've got $110,000 of cash. You've basically doubled the initial investment in a month? That doesn't sound unprofitable to me, that sounds incredibly profitable.
quickthrower2 4y ago
Looks like you added the inventory cost twice? $5 a unit in the unit math and then the $52k. Also do you need to pay the tax immediately?

by manv1 4y ago

jacquesm 4y ago

Depending on the industry 30 or 60 days net may help or hinder you even further.

szundi 4y ago
In my country 120 days is pretty common for Metro or Tesco.

maritimus_bear 4y ago

[dead]

nlh 4y ago

The realities are brutal indeed BUT we should all be using the right terminology here: This is all about cashflow. When you say: > So you use money from the 60k in "profit" to buy inventory, leaving you no profit. That is incorrect. The business still has made a $60k profit, but they have no CASH since they had to redeploy that cash toward additional inventory (which leads to additional profits). > At that point you haven't made anything. It looks like you're making money, but you aren't. Again, sorry: You have made $60k in profits, but you're short on cash. Your business is making money -- you now have the next batch of inventory paid for and you were able to afford that with the profits from the previous batch. Those are real assets, But your business is indeed short on cash -- this is where revolving credit lines and similar financings come into play (which carry a cost and complexity of their own). It's definitely a challenge!

Waterluvian 4y ago
I imagine there’s reasonably priced financial products like business lines of credit, especially if you’re demonstrating a revenue stream and your only issue is cash flow. Ie. You’re not borrowing money for big capex things like renovating a restaurant. Of course nothing is guaranteed. That second batch of coffee may not sell.
- ABCLAW 4y ago
  >I imagine there’s reasonably priced financial products like business lines of credit So much so that there's names for various ways of cutting up the receivables risk. For example: https://www.investopedia.com/terms/f/factor.asp https://www.investopedia.com/terms/f/factor.asp
- lazide 4y ago
  For a long time, those have been nearly free and easy to get. The temptation then is to continue doing more and more marginal business models, because they work and the competition does the same. Those are getting harder to find and more expensive. Lack of those at the right time is what causes the liquidity traps the Fed is always talking about, when it happens at large scale. Little risk of that happening now it seems, and a lot more ‘reaping’ of marginal business is likely before the Fed changes direction.
lazide 4y ago
Notably, with cost of money rising, I’d expect a non trivial percentage of existing business models and businesses to no longer be viable because of this.

tinus_hn 4y ago

I don’t think it is quite normal to start out with orders that make you $60000 profit.

gamblor956 4y ago

The "math" is wrong. You've described cash flow, not profit. You still have a profit of $60k. That you choose to reinvest that profit in acquiring additional inventory does not affect the profit calculation on the inventory already sold.

lazide 4y ago
Only if you actually sell the product at that price, and nothing goes wrong. But yes, they’re talking cashflow and liquidity issues.

MuffinFlavored 4y ago

> So you use money from the 60k in "profit" to buy inventory, leaving you no profit. Not exactly related but I see a lot of comments online from people usually saying "wow, this business is made up of a bunch of greedy profiteers gouging customers for doing _____ behavior" when in reality... aren't most businesses at most running at 10-20% net profit margin? Small, medium, and large?

lazide 4y ago
Yup. It’s easy to point fingers though, if you don’t see the reality on the ground or understand the risks.

michaelt 4y ago

I'm very confused by your numbers here. Are you sure you haven't counted something twice? Let's say you're moving 10,000 units per month. You buy the stock for $50,000, get it delivered for $2,000 and store it for $1,000 - so you had to get an investment of $53,000 to set the business up. You sell the stock for $200,000. Making those sales, you spend $30,000 on shipping, $20,000 on credit card fees, and $40,000 on sales tax (assuming your "taxes means you net $6" means your country has a 20% sales tax which you included in your $20 selling price) At the end of the month you owe your investors $53,000 and you've got $110,000 of cash. You've basically doubled the initial investment in a month? That doesn't sound unprofitable to me, that sounds incredibly profitable.

quickthrower2 4y ago

Looks like you added the inventory cost twice? $5 a unit in the unit math and then the $52k. Also do you need to pay the tax immediately?