An Entrepreneurial Tale of Woe So You Can Avoid It

I once worked with a new entrepreneur who launched an e-Commerce site (Shopify) to sell products he brought in from China. Bringing products from China meant he had long lead times on his inventory purchases. Long lead times force you to carry more inventory (safety stock) while waiting for your next shipment to arrive. Carrying more inventory ties up more of your company's cash.... you can probably see where this story is headed.

He ramped up advertising on his site and products began to sell. He was so excited that he placed an even larger order with his supplier in China, bringing in even more inventory.

At that time, he hired me to look at his inventory ordering and make suggestions on how much of what to order. After taking a look at his sales history, he had too much of some items and not enough of others... a typical scenario for businesses that don't do inventory management.

I made recommendations for his next supplier order, but he was so confident in his new business that he ordered a lot more than I recommended.

Now, remember that all of the inventory you carry is cash tied up that you can't use in your business to pay bills, do research, buy more advertising, do R&D, etc. The more cash you tie up in inventory, the more you tighten your cash flow. [Did you know that most small businesses fail not due to a lack of sales but due to a lack of cash flow?]

The pattern of over-ordering continued and I warned this entrepreneur that eventually, sales will peak and may begin to fall as the various products progress through their life cycle. The ramp-up phase of new product sales cannot last forever. He decided that more advertising would keep that ramp-up going, so he spent more of his cash flow.

He also decided that he should greatly expand the number of SKUs in his ecommerce store. I warned him of the impact of that on his cash flow and recommended that he "wind down" some of the less popular products first and then add a few new SKUs at a time. This would allow him to test new SKUs in a controlled manner.

But he did not heed the warning. He added many new SKUs, further choking his cash flow. As expected, eventually his cash flow was so tight that he could not pay his 3rd party warehouse bill (the people doing his fulfillment). Eventually, the warehouse stopped filling customer orders. Customer complaints went through the roof. Online complaints were many and the reputation of his brand was destroyed.

The lesson from all of this? Protect your cash flow and be smart about the inventory you carry. I'll add a cash flow educational video here for those who would like to learn more.