Very few people go into ecommerce with a comfortable cash cushion. Most start off with just a wee bit of savings and often need the help in bankrolling their business, at least initially.
Dave and I are great examples of this as we experienced the opposite ends of the spectrum when we were first starting our ecommerce businesses.
I was fortunate enough to have some financial advantage when I first got into ecommerce, having achieved success as a poker affiliate a few years back. Dave, on the other hand, had to pool capital from different sources. He used $5,000 of his money, got a $20,000 cash injection, and had to be approved for a $40,000 line of credit from HSBC Canada.
Our varying experiences have taught us a thing or two about how to effectively deal with cash flow. This forms a central part of our discussion on this podcast.
Below is a list of the lessons and realizations that we’ve arrived at in our quest to grow our respective ecommerce businesses while inching towards a respectable inventory turnover.
- Build a relationship with your Chinese suppliers. Earn their trust and confidence.
- Leverage on that relationship you’ve built by paying less money to your Chinese suppliers. Ask for absurd payment terms like 60 days or more. They won’t say yes but will likely negotiate and you’ll still end up with terms that you’re happy with.
- Less Than Container (LCL) is an absolute killer in terms of transit time. It adds about 2 to 3 weeks in transit time because all the shipments in that one container need to be sorted out and accounted for. If it is your own container, you can immediately pick it up at the port and ship to Amazon or to your warehouse.
- Having your own container might be expensive at a glance, but you could potentially end up saving more in terms of cash flow cost if your turn inventory quicker.
- It is less expensive to ship a half-full container than an LCL if you factor in the fact that you won’t be losing 2-3 weeks in your inventory turnover cycle.
- As your business gets bigger, you’ll have a lower profit margin.
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Full Audio Transcript
Intro: This is Mike and welcome to episode number 184 of the EcomCrew Podcast. You go to EcomCrew.com/184 to get to the show notes for this episode. Today we're going to be talking about everyone's favorite topic cash and cash flow, and how it's really important in e-commerce and just some things to keep in mind how Dave approaches cash flow from his business or how he's put cash to work in his new business and so much more than that. So I think it's a fun topic.
It's a topic we've talked about before. When I say fun, again, in air quotes, but it's a very important topic. It's one of these things where if there's one thing that provides stress in my life in e-commerce, it is cash flow. And I'm sure everyone else is in that same boat. And it's a trick of getting the stars to align properly to get the most out of your cash and be able to grow your business as quickly as possible.
So before I dig into that, I do want to mention, this podcast is coming out on October 1st. Our EcomCrew Premium subscription is going to be open through the following day October 2nd at midnight. Once the clock strikes midnight pacific time on October 2, we're closing Premium probably through the rest of the year just based on demand we've had. So if you're interested in joining Dave and I on our twice monthly webinars where we do, one webinar is a Q&A, the other one is behind the scenes of our brands.
We also have four full length courses that are in Premium now, the newest one which is on Facebook Messenger for e-commerce. We also have a Facebook group for everyone who's a part of Premium and you get access to us for any questions you have at anytime, unlimited access to us, one on one email support for both Dave and I, so head on over to EcomCrew.com/premium. Just as a reminder, again, that closes on October 2nd at midnight pacific time. So without further ado, let's hop into the 184th edition of the EcomCrew Podcast.
Mike: This is Mike.
Dave: This is Dave.
Mike: And welcome to this edition of the EcomCrew Podcast. Good to have you back my friend.
Dave: Thanks, Mike. Good to be back.
Mike: Yeah, today's a “fun” topic. I use that in quotes and completely sarcastically.
Dave: I was joking before the podcast that this is the type of stuff that I really get off on. I don't know for whatever reason the businesy stuff is kind of my bread and butter.
Mike: Yeah, I'm a big numbers guy and a business guy as well, for sure. I definitely share your sentiment that way. And we're probably two peas in a pod. But cash flow is also a brutal topic, I guess, when it comes to e-commerce because you never have enough cash, you always want more of it. It's always an ebb in the flow and just a mind jerk exercise of doing do I order more of this inventory or less? And if you're competitive like I am, the ultimate goal is to have one unit of whatever it is left on the shelf the second the container like ends up in Amazon and is checked in and it's like 100% perfectly optimized. And the reality is, that's definitely not possible.
And I liken it to when I used to trade sparks [ph] professionally. I would want to buy it within like an eighth of a point of the low and sell it with an eighth of a point at the high because you wanted to feel like you got a perfect. And the reality is that's not going to happen.
Dave: I know. it's funny I'm just looking at our inventory right now on Amazon and again you can see that probably we're going to have four or five high selling items which are running out of stock before we get new inventory in. And that's kind of the quagmire we’re all in, do you order too much stock and then just have excess inventory or not enough stock and end up being out of stock. But you never get it till that situation that you talked about with the data and run out of stock. There's Amazon checking in your next batch.
Mike: Yeah, and I mean, what we've learned or what I've learned, I shouldn’t put you in this script. We I say on this end of the call just one or two points difference when it comes to cash flow and inventory planning can make a massive difference. At some point in your business when you've used up all the cash you have to buy inventory and you want to be able to grow faster, optimizing your inventory and your cash flow is going to be if not the most important component of that definitely one of the top three. And so it's difficult to get perfect.
And definitely, especially with Jacqueline coming on board, I've learned a lot with this. We put together a bunch of spreadsheets that you probably would just geek out over getting things planned out to the day almost as best as we can, and also looking at expenses and our products but on a skew by skew basis at a whole bunch of different ways. So, definitely interested to dig into this and talk about this. This is a topic by the way we have covered before in the podcast. But I think because it’s just so critical to e-commerce and inventory based business, it's probably good to have a refresher and also get a different point of view.
Dave: Yeah, and I think right now on this time of year September when we're recording this, it'll be October I guess when this goes out. Right now is cash flow crunch time. I'm sure most of us listening are ordering a lot for the holidays. And then once the holidays are done, you're probably trying to order a bunch before Chinese New Year. So, this is at least for me, probably the most stressful time of the year in terms of cash flow.
Mike: Yeah, without a doubt. I call this the gauntlet because we have — it's actually three things. It's the holidays, ordering for the holidays and you have Chinese New Year, then it's taxes.
Dave: I never even thought about the taxes thing. Thankfully our year end is June 30th.
Mike: That definitely helps. I mean the thing that's brutal for us with the taxes is they’re due April 15. And I'm not talking about being brutal, having to like pay tax, that's another whole conversation that we're not going to get involved with on the podcast. It's political. But like it or not, taxes in the United States are due April 15. And inventory is non expense. So this really hurts cash flow from that perspective. You can't deduct inventory that you purchased in 2018 on your on your tax return when you have to pay on 2019.
And if you need to buy more inventory in early 2019 to restock inventory that you sold over the holidays, that also is not an expense or any type of deduction. So what I find is that by the time April 15th rolls around, that day is the most stressful for us from a cash flow perspective. And the next six months seem like easy breezy compared to that once we get past that hurdle.
Dave: Yeah, maybe an aside before we get into the nitty-gritty of how to manage cash flow, just kind of a personal question, when was the last time that you lost sleep, thinking about cash flow, like, oh god, there's not enough money in the bank to make this payment to a supplier or to staff? And I'm not putting you on the spot; we can both share our personal experiences. But when was last time that you can think of?
Mike: It's been never in this business. I'm pretty careful when it comes to this. Like, I don't want to be in that position. There was one time, I guess it was two years ago, yeah two years ago, where we didn't really have enough money to pay our taxes but we did. There's always like a backup, like other money in another account or whatever. So it was that the business was very close to running out of cash. But I knew that I had other money in a personal account if I actually had to pull it out of that. And I’ve always operated this business with a thought that I would never do that. But we put an initial amount of money in not wanting to grow the business from there without having to put more cash in. So I've always treated it like a like a hard line but also knowing that there's a backup.
Dave: Yeah, you're fortunate. I've told a lot of people about this but about five years ago but this is kind of the prelude to me selling my previous business. I mean, there's multiple times where cash flow kept me up at night. But I always remember that there was a time we had to pay a supplier for a big shipment of inventory that we had coming in for the summer, and we sold boating products. So we order normally early in the year, also have payroll to do and literally I think we were last down to the last dollar. And I drained pretty much every penny in my personal account, every penny in the corporate account. And that was probably one of the most stressful times in my life.
And for better or worse, that moment was one of the moments where I said, geez, I keep doing this with an e-commerce company; I need to sell this company. Problem was that my company wasn't sellable at that point. It wasn't making enough money. But that was basically kind of the inflection point where I decided to get our cash flow in order, make the company much more profitable and two years later, sell the company. But in hindsight, I kind of learned you can manage cash flow, it doesn't have to be this stress inducing event. But if you're not managing, it can really work with your brain and your heart.
Mike: Yeah, without a doubt. And there's definitely like I said, we've had it down to the skinny before, but I had a backup. And I know I'm fortunate to be in that position. I think about it almost every single day. So actually, it’s something I think about more and more just more recently, just because I don't know, you go through different cycles in your life. And I realized just how fortunate we are when it comes to that. And I mean, there's a couple of things that put pressure on a business from a cash flow perspective, and one of them for sure, is growth, and I'm sure we'll talk about that in detail here.
But we've been growing at the rate that we have, it definitely is way more stressful and there's more cash flow demands on the business. I'll be talking about this at length in our quarterly goals episode. But because we've made a shift in the last few months to really put the brakes on growth because of outside pressures in e-commerce right now. Tariffs worry me, the economy moving forward worries me, the sales tax situation, just Amazon in general, their platform. Wanting to take a little bit of risk off the table, we’ve stopped pushing the pedal on new products and developing and growing at that rate.
And now that we have, it’s like all this pent up cash flow gain for us. So, the pressure has really been off the last few months because we aren't writing checks for brand new products all the time. So, some of it can be a victim of your own success. And we'll definitely dig into this as we talk about this because there's only — you can only grow so quickly organically without outside funding in an e-commerce business. And that's basically a formula of what's your margin, and how fast you want to grow. And at some point you're going to cap out.
Dave: Yeah, that's the big downside of our business that we're in is e-commerce; you need money to buy stuff, and sell stuff.
Mike: Yeah, I mean, I look back to the poker affiliate days when we were going with that. We had, we were giving away a gift but so there was some expense, but it was all in a microcosm. It was someone signs up for online poker, they get verified, we get paid, they get the gift. To me, I was like, all bang, bang, bang. So there wasn't this long timeline. And that was only for the things what we had to provide a gift on. We were also ranking organically for a lot of things where it was just basically that the cash flow was just money falling out of the sky and there was no hard costs.
So, it's definitely a very, very different business and you end up with the business where the only opportunity to really unlock the value or the cash value of your businesses is to sell it, so you can get the value of the inventory out. But all that aside, let's dig into the basic principles of cash flow. And I think we'll get your point of view more so than anything on this because I've talked about this before on the podcast. There's only so much time. So let me I guess, maybe ask you a bunch of questions. I'm curious how you handle this. I mean, you were in a position where you were starting a brand new company again. You sold your business, you started OffRoading? How much money did you put into the business to begin with? Let's just start with that. And we'll kind of go from there.
Dave: Well, that was the fortunate circumstance that I was in, as you would call it. I had a cash event. So I had an exit from my previous company where I was in the nice position to actually have a bit of money in the bank. And it depends how you equate how much money you're putting into something. Making that first order it was $10,000. This year, basically, our first real year in business, it's close to — there's been times when it's been $200,000 in inventory, which is a terrible amount of money to have tied up in inventory for basically a million dollar company.
Mike: You care to say that to someone who has a million dollars in inventory?
Dave: Well, Mike, if you make the switch positions, and give me your million dollars in inventory, I will trade you $200,000 in inventory.
Mike: If you write me a check for $100,000, I’ll be in.
Dave: But yeah, that's — I was in that fortunate position to be able to spend that much in inventory, and basically just focus on growth. When I first started, I had $5,000 and that was a lot of money. That was money borrowed from parents and like savings. And that was the amount of money I put in when I first started about 10 years ago.
Mike: So let me, I guess let's even go back to that because I do want to ask you and continue this conversation with your current company. But the reality is that probably 95% of people listening to the podcast aren't in that position. They’re probably more in that position of I got $5,000, I'm going to invest that into an inventory based business and then how does the cash flow work from that. And I think actually, that's a fascinating story because Personally, I've actually never approached e-commerce that way, because I was fortunate to also have a cash advance before I started e-commerce to begin with. So how did you take $5,000 and roll that into something that you sold for a million dollars?
Dave: It'd be nice to say that it was bootstrapped the entire way. And it was bootstrapped a significant amount of the way, but that's where basically you hope that you have some family member or a friend that can bank roll you a little bit in the beginning.
Mike: So you had some other cash injection above the 5,000?
Mike: How much was that?
Dave: I believe it was $20,000. And then once that started to roll, we were in a fortunate time where the banks in Canada were still lending. And for some reason I still remember this, HSBC asked me, oh, do you want to apply for a loan? And they literally just asked for a signature, non secured and they basically gave a $40,000 line of credit sight unseen without any due diligence non secured in the company name. And that was a big part of the cash going forward. Unfortunately, for better or worse now in Canada it’s not nearly that easy to get lending. They've cracked down even more. Canada has always been pretty tight but they're even tighter now.
Mike: So I'm making the sacred thing you should never do math on a podcast. But I'm going to take my chances and say that as of the $65,000 of the cash that you had basically to bankroll your business and you were able to turn that into something that you sold for just under a million dollars plus the cost of inventory on top of the sale, correct?
Dave: Yes. And that kind of brings into how do you get more cash? And there's two ways that you can do it. You can either get more cash, or you can basically use the cash that you have more efficiently.
Dave: And the latter option is obviously the easier option, having the cash that you have already and using that more efficiently. And that was kind of the big epiphany that I had quite a few years ago is okay, how do I use this cash more efficiently? And the big kind of light bulb moment was okay, well, I need $100,000 here to grow to where I want to grow to, how can I get $100,000? Well, I have $1,000 in the bank. That's not going to work. So I went, and this was actually a concerted effort with one of my suppliers. I basically I made a concerted effort about six months before I wanted to ask them for lending.
I went over to China, and I hang out with them for a couple of days. I did the whole karaoke thing. They had a trade show that they were doing in the US and I with no immediate return, I said, sure, send your palates to me. And I'll ship them all to the to the trade show for you. I hope you get all your marketing design and all that. I did that about six months before I was about to ask them for some lending. So I did all this. I was in their good bucks.
And six months later, I said, hey, you know I'm paying 50% now when I place the order, 50% before it ships. Do you think I can pay you 100%, 30 days after we receive the items? And I was absolutely shocked. I was kind of shaking in my booty so to speak. When I asked, they’re like, oh yeah sure, and I could not believe it. They’re just without even batting an eyelash, oh, yeah, sure. No problem. They agreed to basically give us net 30 terms.
Mike: Yeah, that’s awesome when it comes to China. I'm still not at that terms yet with anybody. And we've been doing this for a while. So I think you were really fortunate to find a factory that was willing to do that for you.
Dave: Well, that was the thing. And once they said that, I was like, wow, that was easy. So we started doing that to all our suppliers. And we said, hey, do you think that we can just pay you 30 days later? And some of them were very open to it. Some of them said, no, you can't pay us after you receive the goods. But I’ll tell you what we'll do, instead of paying us a deposit, we’ll let you pay everything once the goods ship.
And so that's kind of a big takeaway is that sometimes if you shoot for the moon, even if you miss, you'll still be at the stars. So overshoot, ask for some absurd payment terms, hey, can I pay you 60 days later? They may say no. But chances are they're going to negotiate with you more on at least the payment terms that you have now. So maybe you can avoid even paying a deposit. If you're paying 50% as a deposit, maybe you can get it down to 30%. But ask for some absurd number and then what they counter with is probably something that you'll be happy with.
Mike: Yeah. So, had they not been willing to do that, what do you think you would have been able to do as far as growth without that?
Dave: Well, this kind of comes down to how many times do you turn your inventory in a year? And so I guess maybe I'll put that question to you, too, how many times do you figure that you turn your inventory a year? How long does it — in other words, how long does it take you from when you get a shipment in to sell out of that shipment?
Mike: So we're between three and four turns per year.
Dave: Yeah. So three to four months.
Mike: We're shooting for four but we're close to three right now. But it depends on the items. We have some that are operating pretty quickly or efficiently at four, but that's the target we're heading towards now to try to get more efficient. And we used to be closer to two when we first started before Jacqueline started and we've gotten that down. I mean, again, being able to keep less inventory has helped significantly with growth and being able to finance new products and expand into other markets even though I guess we've kind of backed off a little bit on developing new skews, which I'll talk more about at length in a different podcast. But we still want to have those good basic principles regardless, and the less cash for me in the business, the better.
Dave: Yeah, and I think that's where a lot of people — one thing that a lot of people overlook is that I'm [inaudible 00:20:31] where I say okay, we're aiming for three or four turns a year. But when most people calculate that, including myself, for the most part, I'm just calculating as soon as that inventory arrives at an Amazon FBA warehouse, or until it arrives at your warehouse. But the truth of it is, if you're importing from China, that clock should kind of start the second that you place any money down for that inventory.
Mike: Yeah, we’ve been calculating it on when it ships; we make our payments when it ships. We try to figure it out based on deposit but it's kind of squirrely, because you're not actually buying the whole thing and it's like a smaller portion of it. I mean, it's certainly as a part of it, but we just kind of use the standard calculation for that. But we're mostly been basing it off the time from when it ships.
Dave: But regardless, what you can do is if you take that perspective of when you place some money down, that kind of is a little bit of a light bulb, and it goes to show you okay, what can we do to improve that transit time from the time that we place any money down to our suppliers to the time that we get it into a position where we can sell it, normally that's an Amazon FBA warehouse. And that's one of the things that I've been focusing on especially with OffRoading is okay, how do we decrease that time in between when we place any money or give any money to our Chinese suppliers to the time that we are able to sell that inventory?
And a couple of things that I've learned, number one, obviously try to put less money down, pay less money to your Chinese suppliers. Sometimes that's possible, sometimes it's not. The other kind of aha moment is LCL is an absolute killer in terms of shipment types, and LCL being less than container load. So, if you're shipping less than a container load, basically a shared container with a bunch of other people compared to having your own container, you are adding a minimum of two to three weeks in transit time. Because what needs to happen is that container with all those other people's goods, it comes into the port, and then it gets sent to some third party warehouse.
And they just disassemble that container and break everything up. And then they call everybody, say, hey, you're goods are now finally arrived in this warehouse. And that takes two to three weeks. If it's your own container, you can pick that container up from the port and ship to Amazon, ship to wherever you want and you're saving two to three weeks off the bat.
Mike: Yeah, so can I throw an interesting stat out here real quick that people don't think about? This is something I didn’t think about at least. So if you're trying to do four inventory turns per year, that's you're trying to turn your inventory every 13 weeks. And for every week that you extend that by, so like let's say you're exactly what you're talking about, where it takes an extra two or three weeks because you're doing LCL, each week is 7.6%. So if you extrapolate that, I mean your cash flow or your cash, your ability to grow weakens by 7.6% with every week.
Dave: Per week.
Mike: Yeah, so it's substantial. It's like incredibly substantial that extra two to three weeks. So if you can optimize your logistics process by even just one week, your cash becomes 7.6% more effective.
Dave: It's crazy. So if you improve, if you ship a full container opposed to an LCL and potentially save three weeks, that's probably on the high end, let's say two weeks, you're improving your cash flow by doing almost nothing by 15%.
Mike: Right. And so what we've also realized by doing this calculation is that there's a lot of times because I would — this is not a trap I would fall into because you look at the invoice, you’re like, God Damn, that's $1,000 more. I’m like; I'm not going to pay more to ship a full container or whatever. But the reality is, is that you might be saving $10,000 in cost of cash flow cost. It’s kind of complicated but the reality is, is that if you can turn your inventory that much quicker, the other products you can buy, what else you can do with that money is exponential. There's like a multiplier effect. And it's more amplified; you're putting it through a magnifying glass, so it’s more amplified on the other end than it is on the front end?
Dave: Yeah, yeah absolutely. And the other thing is, with a full container load, aside from the cash flow savings that you get and the efficiency gains that you get, full containers, and this is something that you enlightened me to a couple of years ago, I had about 20 cubic meters for 20 foot container and we're kind of getting mathy here. But a 20 foot container typically holds around 27 to 30 cubic meters. At around 20 cubic meters, sometimes even 15 cubic meters, it's actually cheaper to ship a full container, I say that in quotations, a half full…
Mike: Your own container.
Dave: Yes, there you go. That simplifies it. Your own container, even if it's half full, opposed to doing LCL. And a lot of times, I know I got into the trap where suppliers were telling me well, hey, Dave, you're leaving seven, eight empty cubic meters here. Why don't you fill it up and spend $20,000 more on inventory? And I thought, well, yeah geez; I'm just wasting the space. Well, that ties up your money potentially for weeks and months. Don't get sucked into that trap number one.
And number two, it's okay, just ship a container with empty space in it if you're going to get like Mike talked about 7% savings per week. And you're going to just improve that opportunity cost of your capital. Every dollar you have has an opportunity cost and you can put that money towards new products, improving your stockage of other items. So that was a big…
Mike: You mentioned something else there real quick that I just want to mention real quick. You're talking about let's fill up this container because you don't want to ship that air. Well, we would also — another trap that I fell into quite a bit was let's fill up the container and order more than we need to get a better price.
Dave: Sounds like a guy who just disordered 10,000 tactical flashlights.
Mike: Well, that's another cool story. That wasn't MOQ issue. That aside, there's lots of products where it's like, okay well, if you order, you know you're going to sell them this year, let's order double the amount and save 50 cents per unit, let's save 5% or something. The reality was, when we ran the numbers, that it's way better just to pay the 5% more because of the cost of the cash to the business and being able to, again, to expand and use that for other things, not knowing that tariffs might be coming along.
And it would have been cheaper to get it because — so that aside, so you got to run this all the way through and not look at each calculation one by one. I think that was the problem that I fell into, because I didn't have a way of thinking at a bigger picture level. So, I would look at the invoice for the shipping and be like, oh well, I want the cheapest possible shipping rate. So I'm going to make this decision. Then I would look at the invoice for the product itself, and make a decision of, of course I want to buy more and get the lowest price because we all get in this mindset of I want to pay the lowest price for the item and you get tunnel vision to that.
And there's other things that we would look at, but not thinking of the converse effect of, well, now we get to store the product, and I have to hold on to it. And there's a cost to the money. And there's a cost to the business by not being able to use that to buy another product that I can be running another parallel race in my business with to start growing and get sales with. And so these are the things that I've learned that have helped our cash flow significantly and helped us grow and do it even though we've been growing at a pretty fast rate, do it in a way that isn't losing sleep at night, on a cash flow basis.
Dave: Yeah. And in finance there’s a thing called the opportunity cost of capital within a business. And unfortunately, the small businesses, most of us don't know this. I don't know for my company, I can make a guess what it is. But I don't have it narrowed down to the exact decimal. And my estimate is probably way off. But having a good sense of how much ROI can you get on every dollar that you spend, it’ll really help you to make those types of decisions. How much should I order, how much am I going to be better off by leaving more money in the bank rather than saving 5% on a larger order?
Mike: Yeah, okay, so circling back because I want to try to wrap up this thought process, you had $5,000 initial investment in your building business, $20,000 from friends and family, $40,000 from the Bank of Canada. And so you started, you basically had $65,000 initial cash that you put in the business. And then you were able to sustain that growth and gets to the point where you did over a few year period it sounds like mostly because you had vendor financing.
Dave: That was a big part of it. You also have to remember, I started the company in 2008. By time I sold it 2016, there was a lot of bootstrapping that went into effect rolling over a little bit of profit every year, rolling over a little bit of profit. And that's one of the benefits I've been in having an exit on the previous company was now there's a little bit of cash in the bank where when I first started, it was simply rolling over those profits slowly, year after year after year and it's a grind, because like we all know, ecommerce is so cash flow dependent than taking that time to save up money. It does, it's painful. It takes a long time.
Mike: I mean, it's like exactly what I want to talk about is to talk about how it is a grind, going from — so let's say you had $10,000 initial investment just to use a round number. When you sell through that inventory, what do you expect to have after all expenses, after selling through a full ton of inventory?
Dave: Well, now I'm in the — now I've kind of figured out that I want 100% ROI. I think we're on the same page with that.
Dave: So in this new company, it's whatever you say, it's $200,000 in inventory. I want at the end of the year to see $200,000 going up into my pocket one way or the other.
Mike: But let's use the 10,000 example if you just you use smaller. And so when you sell through $10,000, you want $20,000 after you sold that?
Dave: At the end of the year.
Mike: So that's…
Dave: I kind of look at it as an ROI as an annual basis. I know you, if you do it on a per shipment basis that works through I think 100% ROI, that would assume if you have $10,000 for a year and you turn your inventory four times you'd be making $40,000. I think that's a little bit high.
Mike: Yeah, I do too because I mean, the reality — that's what we do look at per inventory term and that still remains. But the reality is that that's on a gross profit stage. I mean, the net profit especially with the size of organization we have and the way that we're moving China, the type of business that we are, that isn't realistic on a net profit basis. So I was just curious, like for you, you're selling — I can tell you I'm going to get to how we calculate, I'm just curious, so you're talking about $10,000 worth inventory, at the end of the year, you're going to have $20,000 in the bank is how you look at it?
Dave: Yeah, and if you equate that to a purchase, assuming four turns a year, it's basically 25% return on each dollar.
Mike: Got you. So the way that — the reality the way that it's worked out for us as if we were to buy $10,000 worth of the inventory, it's going to be about $30,000 with the retail value between 30 and 50,000. And we're making about a 10% net profit. So the $10,000 worth of the inventory is going to generate three to $4,000 in profit, the first turn, and then the next turn, I don't know what that works out to. But let's say $3,000, the first turn; let's say 4,000, the next turn, 5,000, 6,000, something like that next turn. So we're pretty close to where you're at it maybe a little bit more.
Dave: Yeah. And I think that's also another great strategy that you can take to improve your cash flow is as you get bigger, you have a lower profit margin because you have higher expenses, you have warehouses and offices and people that you have to worry about. I'm in that situation now, where aside from a VA and a 3PL, there's really no — and a 3PL is not even a fixed cost. There's minimal fixed costs in my business and that improves the profit margin. And that improves how much money I can keep rolling back into the company year after year.
And growing faster than you can support and you're not in this position but I know in my previous company we grew too fast and it hurt our profit margin. And what happened, that tied up our cash flow. When you tied up your cash flow, now, you can't invest that money and get a better ROI. And it's like this compounding effect where once your cash flow gets killed; it just kills your whole business literally.
Mike: And it really boxes you in. Okay. And then to talk more about just like the new company because I'm curious, just real quick here to wrap up. It sounds like you put about $200,000 of your own money into this business at this point.
Dave: That's the maximum that we've ever had in inventory. On an average basis, it's probably closer to 100, 150. But there's been times where just ordering a bunch of product because we're launching new products or whatever, at a peak it's been $200,000.
Mike: But you've been also selling for a year. So at some point, you've had some profit from this business as well.
Dave: Yes. I mean, I've been taking all pretty much all profit I just take as paycheck though into my pocket.
Mike: Got you. Okay. Interesting. Well, definitely an interesting conversation. Did you have any other, any thoughts from notes on your end?
Dave: No, I don't think we talked about how to get more money. But we can save that for another podcast.
Mike: Yeah, I think that's probably another — I think we've actually done that podcast. We talked about Amazon loans, Cabbage, some of the other — going to a bank and talking to your vendors. That's another whole — the other whole thing, which Abby will link to that podcast. I know we've done that one, but something we could revisit for 2018 or something in the future. But I think from a cash flow perspective, this kind of covers it, the main things, the pace of which you and I have grown at and how we've approached cash flow and also taxes, at least kind of at a high level, which is important to plan for, from a cash flow perspective as well.
If this is the first time you're hearing about taxes, and in commerce business, I'll just reiterate, I think it's important. And I am not a tax accountant. And this is not advice. I have to always like say that crap from a legalese thing, but inventory is not a write off. And there are some new roles and things about that, where if you're below a certain size, and this — I've actually gotten a couple of different answers to my own accounting on this. But be careful about how you're treating purchasing inventory and expensing that because you can get in a situation in April where you owe more money than you physically have. And that's never a good spot to be in.
Dave: Yeah, and to paint that picture of you place an order today for $10,000, you don't get to write that off until you sell it one unit by one unit.
Mike: Exactly yeah. All right my friend. I appreciate you coming on. And until the next one, we'll talk soon.
Dave: Talk to you guys later.
Mike: And that's a wrap folks. I hope you guys enjoyed the 184th installment of the EcomCrew Podcast. Inching ever so closely to that 200 mark, which is pretty darn neat. I couldn't be doing this without you guys and your support. I want to thank you guys for listening to another episode of the podcast, telling a friend about it, whatever it might be. It definitely means a lot to us. So that's going to do it for this week, guys. Until the next one, happy selling, and we'll talk to you soon.