Open to Buy

Part of the idea of my blog is to give a view from behind the counter at my shop.  Here goes...

Did you know it's possible for a business to grow itself out of business?  Actually it is, and there's a formula in one of my corporate finance books around here.  The idea is that, in funding your future activity with current dollars, your future sales are so big that you end up going bankrupt even as you have amazing cashflow.

That's not quite my problem, but I've been thinking about that as I deal with my current issue.  In a retail shop, the only source of revenue is the inventory.  You can't make money if it isn't in the shop to sell, flat out.  My method of buying was, I thought, kind of careful, replacing only what I liked as it sold, increasing inventory judiciously.  But I didn't really link it with revenue or actual sales. Part of that was because, when I opened, I had held back a portion of my initial investment to increase inventory later, as I got to know my customer base.  Good idea, but it made me feel like I had money burning a hole in my pocket!

Fast-forward to this summer, as I'm doing my summer/fall buying in preparation for the fall high season.  No "extra" money this year. In addition to replacing my low stock in preparation for fall, I also expanded into several new lines, to the tune of several thousand dollars.  It's not as stupid as it sounds, because I did it in several baby steps:  visits with reps during April, the trade show in June, and rebalancing as I assessed my stock.  (It was kind of stupid.)  BUT I hadn't planned on terrible cash flow in May.  May was awful, and I was unprepared for it.  And then June wasn't much better.  So, I increased inventory while my cash flow was through the floor.  This is bad news!!

Enter Open to Buy.  This is an inventory system based on cash flow and expected sales, a way to put yourself on a diet.  The idea is this:  at the end of the month, total your sales.  Take 50% of that, and that is how much you buy the next month.  Period, with a couple of caveats.  For instance, consider your sales trends.  Low expected sales?  Lay off!  Don't buy as much.  Only buy in anticipation of a good month.  So for me, I should let my inventory dwindle a little during April-July, and then slam the shop full by October.  The method of buying keeps you from having a full shop during months you just know you won't sell anything!

So I had way way WAY overbought this summer.  And my cash flow was terrible, negative actually.  I was glad to be able to give an influx of cash, drawing on my own personal credit line.  (Writing that loan check to the shop was probably my all-time low so far with this business.)

I implemented Open to Buy in August.  Ugh.  I overbought tremendously, but mostly because July was such a low-sales month.  September was better, but again a little over the line, because of deliveries I had had scheduled and just couldn't give up.  Now, I'm only half-way through October and I've hit my limit!  I don't quite know what to do...I'm out of needles to go with my yarn.  This is after TWO purchases of needles this month.

A tightly run shop requires more than a good eye and a great passion for my customers.  This has been a hard lesson to learn, even though it seems like a retired actuary should have this part down cold.  But--ouch!  It is a tightrope.  I don't like seeing some of these empty shelves, but it is better than an empty bank account.