The Cost of Financing Inventory

What does it really cost you to carry your inventory on credit.  Did you know that when a term like 2/10, net/30 is given, and you choose to wait till the end of the term to pay, it costs you as much as a loan that has an APR of 36.5%. In other words, if you are going to finance your inventory you are better off shopping around.

The annual rate is computed as follows:

Annual rate = Discount rate * (365 days / Term of the loan)

Using our example of 2/10, net 30, the number of days financed is 20days because there is a discount available for the first 10days it cannot be included in the financing days.  In other words, you are forgoing a 2% discount to obtain a 20 day loan.  Plugging in the numbers to the formula we get:

Annual rate = 2% * (365/20) = 36.5%

I strongly discourage debt even in business, there are ways you can plan where you don’t have to use debt to carry your inventory but if you must finance your inventory you are better off looking for better terms at a bank.

Advertisements

Keeping an eye on business

I have come across entrepreneurs who thought because they had the genius to come up with an idea they have the knowledge to run a business. After setting shop, they quickly find out that running a business and pursuing an idea are two different concepts. However, these concepts do not run in isolation of each other. A good concept can become a good business if entrepreneurs learn to keep an eye on the business.  Keeping an eye on business can be broken into two success criteria’s namely:  hard and soft measurements. Soft data are harder to define because they include factors that are difficult to quantify such as customer satisfaction, employee satisfaction, etc. These indicators can be derived through surveys and open honest discussions with employees and clients.  Hard data are easier to quantify and include measurements like cost and revenue. There are three main areas of hard data a business owner should look at to determine their financial health namely:

1)      Cost of operating the business: you should know total cost of running your business some of the questions to ask in this area are

  • Am I spending too much on supplies?
  •  Can profit margin be increased by buying in bulk or paying on time? If your business is not taking advantage of opportunities presented to it then a plan should be devised to close the opportunity gap
  • Are there any areas where I can cut expenses without compromising the integrity of the business?

 

2)      Revenue: Some of the questions to ask are:

  • Am I taking advantage of all revenue streams available to me?
  • How can I integrate fresh ideas to increase revenue?
    • Profit:  In addition to revenue, profit should be considered. Profit is the difference between revenue and expenses. As a business owner it is important that all business lines are profitable

 

3) Cash flow: You also should keep a close eye on cash flow and make cash projections for adequate planning

There is no such thing as a stagnant business, a business that is not growing is a business that is dying. The extent which you choose to monitor these metrics corresponds to how big you will like to grow. Even business that want to remain same size have to have growth plans to make up for business lost.

Penny wise but pound foolish

So it is the end of the year and you have this big pile of cash sitting in your account. You fear that if you do not spend it you will have to pay huge taxes on this cash.

 

This problem is typical of most successful small businesses. The only way most business owners feel they can advert this tax is by making a huge purchase which by the way is not really necessary. So now this business owner has spent $20,000 to avoid an additional $5,000 in taxes. I call this penny wise and pound foolish for while he/ she has adverted $5,000 in taxes he is out of an extra $15,000. It is never a wise purchase to buy things you do not need to “save money”.  So what happens next year, there is not enough money to cover inventory and now the business has to go into debt to cover expenses and this vicious cycle goes on year after year.

Be sure to hire a professional if you do not understand how to evaluate how your business is really doing.

Are you still dialing the wrong number?

I feel silly telling you this but about a year ago I bought a new phone and just figured out how to use the voicemail system. You see on the last couple of phones I have owned, the number to dial out to get voicemail has always been the same. However, on this new phone it was a different set up.  When someone called and I was not available I simply called back and they will always assume I have heard their message. Just recently when I was playing around with my phone I discovered why my voicemail system did not work properly, I WAS DIALING OUT THE WRONG NUMBER. I immediately changed the programming and old messages that were left on the system started coming through. The question that came to my mind at this point is:

How many times do we force things to work just because it has always worked that way in the past?

 In today’s world, where things are continuously changing we have to be proactive and consistently find solutions that work for today’s problems. We have to learn to dial out the right numbers or ask for help when we cannot find the right number to dial. I claimed I was too busy to call the phone company because past experience was telling me I will probably spend about an hour or more on the phone with them. However that one hour I had refused to spend cost me about 10 hours over the year I have owned this phone.

So my question to you is are you dialing the right number or are you seeking understanding of what right numbers you should be dialing?

FOUR SIMPLE STEPS FOR SETTING GOALS

Ares I-X launches from Kennedy Space Center la...

Ares I-X launches from Kennedy Space Center launch pad 39B, 15:30 UTC, October 28, 2009. (Photo credit: Wikipedia)

Remember I-bee: identify, breakdown, educate and evaluate. These are the four simple steps that if implemented can be used to accomplish most goals.

Step 1: Identify and write down your goals

Step 2: Break each goal down into several short-term (less than 1 year), medium-term (1 to 3 years) and long-term (5 years or more) goals.

Step 3: Educate yourself on how to accomplish these goals. Then take the necessary steps to create a plan to accomplish the set goals.

Step 4: Evaluate your progress. Goals are an ever evolving thing. You will find that as long as you are growing, you will have to move through the steps multiple times.

“When thinking won’t cure fear, action will.”

“When thinking won’t cure fear, action will.” William Clement Stone

 

 

“You can transform your life and business in just seven minutes a day.”

Ask yourself, what you are doing today to move one step closer to your dream. Do not be trapped

by the urgencies of today and forget what is really important. In just seven minutes you can choose

to do something you will not ordinarily have done. Seven minutes of daily reflection can make a

difference in the choices you make.

Ask yourself what can I do differently today to get one step closer to my dreams.

Planning to succeed.

Ever tried to launch a new period and was faced with the decision to price it.  It sounds insane to buy a product for $10 and sell for $11 but yet a lot of businesses engage in this practice because they have no idea how much it truly costs to bring the product to market. This is why cost management is important. Most often the indirect costs of launching a product are often ignored and not apportioned to the total cost. This is why sometimes it seems like you should be making a lot of money but yet the bottom line never shows it. A budget could help you think through all the possible scenarios you will need to successfully launch your product. A budget does not have to be long and tedious as long as it is relevant to the tasks at hand. While developing your budget do not be afraid to ask the difficult questions like what will happen if my most optimistic sales do not occur. In circumstance where fixed costs are high, honestly answering this question is very important as you will need a minimum amount of sales to break even.

When starting out and testing the market try to keep as much of your expenses variable and do not forget to contact an expert to see how different scenarios could affect the taxes you will owe. Taxes are one of the biggest expenses that erode profit and with proper planning you could maximize profits and minimize taxes.