In all my years of being in the clothing industry, in one facet or another, I have come across many companies (and people) that have made many mistakes. Seeing as how I see the same pattern of the same mistakes made repeatedly, I thought maybe I should start talking about it so that some of you can learn from it.
The ironic part (which I already know) is that many of you will read this and will still make the same mistakes because you will think there is something inherently different about your situation.
So with that, here it goes:
Lesson 1- Don’t hoard merchandise
I see so many people do this because of the inherent difficult of being in the off-price business- what you see today may not be available tomorrow. Inevitably some people get freaked out and think they have to buy everything they can because there will be a scarcity of merchandise. The reality is there is usually always another deal somewhere. While one particular deal may sell out, there is never really a lack of something to buy.
What usually happens is that people finance their hoarding in one of two ways:
Terms from their supplier (where they give you 30 days to pay) or
Yes, I know it’s often a good deal to buy merchandise on credit cards and rack up airline miles or other perks because you pay it off every month, but the people who pay their purchases off every month are hardly ever hoarders because hoarders buy more than they can handle.
What usually happens is people say “I’ll buy it today, and I have a month before I have to pay my vendor or credit card bill and I will pay off enough of it with what I have sold.
But what actually happens is much of the time, they didn’t sell enough to pay back everything they purchased and thus starts this cycle of accruing debt. Many people in this industry lack the discipline to keep their purchases limited to what they actually sell and base their purchases on what (optimistically) they think they can sell.
In business school (yes I have a degree in business) you learn about a concept called inventory turnover (or inventory turn). Please read this. Even though you don’t need to be a financial wizard, understanding inventory turnover is crucial to understanding how much merchandise you should buy and avoiding overbuying.
Here’s a quote from that site:
Every time we sell an amount of a product, product line, or other group of items equal to the average amount of money we have invested in those items, we have “turned” our inventory…
As you determine your inventory turnover goals, consider the average gross margin you receive on the sale of products. Most distributors who have 20% – 30% gross margins should strive to achieve an overall turnover rate of five to six turns per year. Distributors with lower margins require higher stock turnover. If your company enjoys high gross margins, you can afford to turn your inventory less often.
A turnover rate of six turns per year doesnt mean that the stock of every item will turn six times. The stock of popular, fast moving items should turn more often (up to 12 times per year). Slow moving items may turn only once, or not at all.
Now the reason hoarding doesn’t work is very rarely does a person buy enough fast-turning merchandise in a load to sell it to pay off the entire purchase. Even if you sell on eBay (and I don’t care how much you beg to differ), it is still a challenge to turn enough of your inventory, at a high enough profit, to pay off the entire purchase you made.
Hoarding is usually the first step down a slippery slope leading right into debt. I know some hoarders who make impressive purchases of thousands or tens of thousands of dollars, but are no more profitable than those who purchase smaller amounts more frequently. Please read this page for an explanation of how that happens. Especially, once you consider large amounts of unsold inventory often makes sellers nervous which leads to discounting just to increase the cash flow. And once you’ve added discounting on top of hoarding, you’ve really reduced your profits.