The Inventory/Cash Balance
by Phil Wrzesinski
My grandfather started Toy House, our toy store, back in 1949. When we closed in 2016, I found some of his writings that had been buried in a file. One little gem was a six-page handwritten manifesto titled, “Business is a Matter of Balance” that he wrote back in 1969. I was only 2 at the time, but the words are as true today as the day he wrote them.
The biggest issue of “balance” to him was inventory and cash. Finding that sweet spot of just the right amount of inventory is a retailer’s hardest job. If you get too out of line, you either have too much inventory and no cash to pay the bills, or too little inventory, with nothing to sell to make more money.
According to his manifesto, that imbalance affects everything else in the store. Too much inventory and you’re paying for advertisements to sell it. You’re discounting it and losing profits. You need more employees to try to sell it. Too little inventory and you’re paying for staff to sit around with nothing to sell and no money coming in.
The long-awaited holiday season is now upon us. The inventory balancing game is about to be played out in stores across America. Here is how it usually happens.
• In early November pundits predict a huge increase in holiday sales for the season. At the same time you see a run on a particular product line you weren’t expecting to be that hot. You panic; afraid you won’t have enough inventory, and start ordering more.
• The lead-up to Thanksgiving, Black Friday and Small Business Saturday are strong. New product trends emerge. You sense a big season coming. You order even more inventory.
• The post-Thanksgiving slowdown sets in as Cyber Monday hits and online sellers start their heavy discounting; knowing they have to sell it earlier in the month to make sure it ships on time. Your pre-Thanksgiving orders start arriving at the same time your business slows down. You start to panic. You fear you have too much inventory. You start canceling orders and begin wondering when to start marking prices down to move all the excess.
• The guaranteed-to-ship-in-time deadline for online sellers approaches and your business starts to pick up again. The final week before Christmas your store is hopping. You wish you hadn’t canceled all those orders two weeks ago. You’re desperately looking for vendors who can ship same day and arrive in the store quickly.
• Christmas has finally come. You’re in your store the day after only to find that two of those last-second orders have also just arrived. You run the numbers to see if you found the right balance or not before deciding whether to refuse those shipments or keep them.
I know from playing this game myself for a few decades that, over the subsequent six weeks, there will be multiple times in which you feel you have too little inventory and want to order more. There will also be multiple times where you feel you have too much inventory and need to start discounting. That is the nature of the season.
Here are some things to remember.
- The pundits will always predict robust holiday spending. Even in 2008 with the housing market collapsing there were plenty of predictions for big holiday spending. Nobody wants to be the bearer of bad news.
- Your Thanksgiving week will be strong. It might happen on Wednesday. It might happen on Saturday. It might still be all about Friday, but it will be a good week overall.
- The first two weeks of December will feel incredibly slow (unless you have strong Chanukah sales in your area). This is what ecommerce has done to the holiday selling season. It is the new nature of the retail world.
- The last seven days will be approximately 10 percent of your annual sales. Go ahead and do the math for the last 10 years. Scary, isn’t it?
How do you keep it in balance?
First, don’t panic. You have a blueprint of the ebbs and flows of the holiday season. Expect it and plan for it. Stock and staff your store accordingly.
Second, work it backwards. How much inventory do you want on hand for post-Christmas? Are you a strong gift-card seller, a major birthday-gift seller, or in a holiday tourist area? You may want a little more inventory on hand to maximize those sales. How much inventory do you need to get 10 percent of your annual sales in that last week before Christmas? Add those two numbers together and you have a much better idea of what will be a good balance for your inventory.
Third, before you jump on the bandwagon of any early hot sellers, think about how well that item will sell post-Christmas. If it fits the theme of your store, the birthday price points, and the needs of January shoppers, then go ahead and overbuy it. If it doesn’t, order with caution and remember that you may have to dump it and take a loss in that last frenzied week.
Finally, keep yourself in balance. Take your vitamins. Protect your sleep. Eat well. Find time for yourself, even if only a few minutes a day. When you are balanced you will make better decisions for the balance of your store.
It was true in 1969 when my grandfather wrote his manifesto. It is still true today.
Phil is the former owner of Toy House and Baby Too in Jackson, Michigan, one of “The 25 best independent stores in America” says George Whalin in his book Retail Superstars. Now Phil takes the lessons he learned in a lifetime of retail to help other independent merchants and small businesses find their success. Learn more at PhilsForum.com.