When I went looking for a loan to start our garden shop, the first question I was asked was: "How much inventory per square feet?" Because it was a physical brick-and-mortar store, inventory turnover, as well as value of the goods, was considered a big part of the profitability equation.
To figure out how much inventory per square feet, we had to know how big the sales floor was and then figure out how much stuff we could pack into it. Shelves, hanging stock and peg board meant we could pack more stuff into our little shop. Maximizing floor space also meant a closet-size office space and off-site inventory storage (our garage).
As the years progressed, we monitored inventory and the shelf space it took up. The bigger the item, the shorter the time it was allowed to collect dust on the shelf. We were a small store, and these were the pre-spreadsheet, bar code or other inventory-tracking software days. Despite the lack of tracking software, we knew those inventory numbers—we had to. Our profitability depended on it.
Fast forward 20 years, and I find myself selling online, working in an office that, by my garden store standards, seems like a mansion. Ah, the joy—I don't have to open the doors to impatient customers at a certain time every day, or come face to face with a cranky Joe. And I don't have to dust the inventory—well, that is, until it actually sells.
Costs for storing that 'in home' inventory include electricity and insurance
Cost versus benefits
But I still monitor my inventory and gauge my business on the value of the inventory and how fast it moves out the door. Have you considered the cost of your inventory? Even if you're selling used items found at a yard sale and stored in your garage, the "shelf life" of these items affects your business in many ways.
Of course, the value of your inventory is an asset—and it's conventional wisdom that the more you list, the more you sell. Just like a standard brick-and-mortar store, having a depth of inventory is important.
However, equally important is keeping the product moving out the door. Most large retailers only order enough stock for a very short period of time—a season, a month or a few weeks. This "on demand" inventory keeps the cash flowing—not tied up, which can result in lost profits.
For example, cash from sales can help you pay for your inventory within the 10-day "dating" period, typically saving you 2 percent on the purchase. This is important if you're selling in a competitive market, where your margin may be just 7 percent to 9 percent.
Having cash on hand can also save you money if it lets you avoid purchasing your product with a line of credit or a credit card (with their high interest rates, it will be next to impossible to make a profit if you don't pay them down/off monthly).
The dangers of too much
Lost opportunity doesn't affect only those selling new commodity items. It applies to all sellers. It's the danger of keeping too much inventory. I experienced this recently at an estate auction: I lost out on a number of great cameras that I could have sold for a nice profit—but I didn't want to lose the profits to my credit card company. If I had cash in hand, I would have been able to make a quick couple thousand. But as it was, my money was tied up with a new line of products.
The cost of housing inventory is another consideration. You may be selling out of your house and think there are no costs associated with storage. Perhaps that's true if you aren't using your spare room for anything else, but there are often hidden or unexpected costs.
A friend of mine who's an eBay seller lives near the ocean. The salty humidity affects the collectibles she has in storage, so she must run fans to ventilate the room. Her cost of housing inventory shows up in her monthly electric bill.
Other costs for that "in home" inventory include insurance. You should have a rider on your insurance policy to cover the loss of inventory in a disaster, just as you would in a conventional business.
And of course, the room in your home is most likely limited and once you fill the space, you'll be looking for outside storage—another inventory cost.
If six months later, an item is still sitting on my office shelf, I start discounting it, or move it to auction
How long is ideal?
What is the ideal amount of time to keep inventory? The answer to this depends on your business model. If you're selling out of your home, and using cash to purchase inexpensive items that you can sell for double or triple what you paid, you'll have more time to let your items collect dust.
For instance, Lynn Dralle, The Queen of Auctions sells collectibles, almost exclusively. She rotates her inventory out if it doesn't sell from her eBay Store after two years.
A seller of new items—the potential value of which may fall as a result of declining popularity or outdated technology—has less time to wait. If I've purchased an item and six months later it's still sitting on my office shelf, I start discounting it, or move it to auction.
The seller who has items drop-shipped for them doesn't have as much pressure to move inventory out, and can keep the listing up for years. However that may be a false economy because of regular changes to the eBay site. You may spend hours updating your inventory and never see a sale. As we all know, time is our most valuable asset and it shouldn't be wasted on an unsellable item. I suggest using eBay's benchmark of 16 months. Once you see the eBay flag that indicates there have been no sales, remove the listing.
What are your thoughts or experiences about holding inventory? I'd love to hear them. Please join me on Facebook, and we can discuss this. See you there.