5 Painstaking Lessons Learned From Managing Inventory and Cash Flow The Wrong Way

Share On Facebook

Recently, my wife and I moved our ecommerce store into a brand new facility and it was one of the most stressful experiences that we’ve gone through in awhile.

Now moving is always a pain. But just imagine running a business and trying to fulfill orders while thousands of pounds of inventory are in complete disarray with linens littered all over the office.

On top of that, imagine that you have 4 employees who you must manage efficiently in this environment to move product out the door.

5 Painstaking Lessons Learned From Managing Inventory and Cash Flow The Wrong Way

Now my wife and I didn’t really want to move, but a few events forced our hand.

First of all, our lease was running out so we needed to either renew the contract or find a new place ASAP.

Second of all, finding a larger space was a necessary evil because we scheduled a 20 ft container of linens to arrive the following week and our old office was too small to store the new shipment:)

I even turned off ads for a brief period during the transition so my wife and I would not go crazy (This was particularly painful for me because I hate leaving money on the table).

Below is a picture of one of the warehouse areas of the new office. It took 6 guys 2 full days to move us in.

Moving offices

Now as someone who teaches ecommerce and strongly encourages entrepreneurship, why am I telling you this?

Well after going through moving hell, I wanted to give you a dose of reality to show you that running an inventory based business is a ton of work and that there’s a lot of hardship that goes along with it.

Don’t get me wrong. I love running Bumblebee Linens

But there are a few important things that you need to realize about carrying inventory that may not be obvious to new entrepreneurs.

Lesson #1: You Will Be Investing A Significant Portion Of Your Profits Back Into Inventory

boxes

Here’s the funny thing about running an inventory based ecommerce business.

On paper, you could be insanely profitable but from a cash flow perspective, you could be broke.

Let me explain.

In order to make money with physical products, you have to have product in stock. If there is no product to sell, then you can’t make money.

It’s that simple.

Inventory costs a lot of money and in order to get the best prices, you need to buy in bulk.

For Bumblebee Linens, we routinely write large checks to fund inventory and we recently dropped 6 figures to purchase enough product to last through the holidays.

Writing 6 figure checks can be scary.

But we make these large purchases because we KNOW that everything will sell over the holidays. And in order to make money, you have to feed the machine.

Now hypothetically speaking, let’s say that your margins are 50% and you invest $100K on inventory. This means that you’ll bring in $200K in revenue when this batch of merchandise sells out.

Ignoring overhead costs, this is a cool $100K in gross profit. $100K in profit sounds pretty good on paper right?

But let’s say that your products continue to fly off the shelves and you start running low on merchandise.

Demand continues to skyrocket and based on your manufacturing lead times and what Amazon tells you, you need to make another inventory purchase of twice the amount to keep your stuff in stock.

So this time, you decide to make an inventory purchase of $200K instead of $100K.

Here’s where the problems start…

Lesson #2: Profits Do Not Equate To Cash

office

First off, spending $200K on inventory is no joke. In this example, this is every single penny that you just made.

Note: You don’t have to order this much but if you don’t make the investment, you could run out of stock and stunt your growth.

But wait? Don’t you need some of this money to live on? How are you going to pay the bills?

At this point, you have to make the difficult decision of whether to go all in on your business or to take some money off the table.

Meanwhile, the tax man can kill you too if you are caught off guard.

Remember when I said that you could be insanely profitable but cash flow starved?

In the previous example, you made $100K in profit which means that you have to pay taxes on this $100K to Uncle Sam at the end of the year.

But wait Steve… Didn’t you just spend $200K on new inventory? Shouldn’t this cancel out your profits?

Unfortunately by the rules of accounting, you can not deduct your entire cost of inventory as an expense in one fell swoop. You can only deduct the cost of a product once you’ve completed the sale.

Note: This is the single biggest pitfall that MOST new entrepreneurs overlook!

Assuming a 33% tax rate, you would have to pay $33K in taxes on your profits to Uncle Sam IN ADDITION to the $200K in inventory to fund your business.

So in reality, even though you made $100K in profit on paper, you would still be cash flow negative by 33K!

Lesson #3: Set Aside Some Money For Taxes

monetary risk

I have several friends that realized this fact too late and didn’t have enough money saved to pay the tax bill at the end of the year.

Some of these friends had to borrow money or dig into their retirement plans just to pay Uncle Sam even though their businesses were insanely profitable on paper.

Unfortunately, many entrepreneurs fall into this trap.

Anyone who sells on Amazon knows that running out of inventory is one of the worst things that can happen with your business.

And the need to preserve your product rankings often leads to a vicious cycle of increased risk.

You make a killing selling products online which is used to fund your future inventory which continues to increase in cost as your business grows.

And pretty soon, you find yourself writing 6 figure checks and moving to a larger warehouse:).

Right now, I know several colleagues who have borrowed hundreds of thousands of dollars just to make it through this holiday season.

The machine constantly needs to be fed!

Lesson #4: Don’t Rely On Amazon As Your Only Sales Channel

Amazon risky

Besides worrying about taxes, there’s also a lot of risk if you rely on Amazon as your only channel.

In our previous example, we decided to invest 200K on inventory based on Amazon’s current sales projections. Our products are flying off the shelves and we don’t want to run out!

But let’s say that we run out of inventory well before the next shipment arrives.

Well guess what? Our sales rank on Amazon will tank.

And even though we have 200K in inventory on its way, there’s no guarantee that our sales velocity will recover. In fact, this has happened to many of my colleagues.

They place a large order based on current projections only to find that sales have tanked and are slow to recover by the time they’ve received their inventory.

Even worse, I’ve had friends who have gotten their listings or accounts banned after placing huge orders with their vendors!

All it takes is one accidental bad batch of goods and a small string of negative feedback to put your listing in danger.

And guess what? You’re screwed if you don’t have another platform to sell your goods.

This is why having your own web property is so important!

In fact, I would not be as confident placing large orders with my vendors if I didn’t make the majority of sales on my own site.

After all, no one can ban me and my sales are very predictable from year to year.

Lesson #5: Be Conscious Of Your Growth

stress

Over the years, I’ve witnessed many ecommerce entrepreneurs who have gotten completely carried away with “feeding the machine”.

And here’s the thing.

When you’re making sales at an exponential rate, you need to dig deep and remember why you started your business in the first place.

Was it to improve your lifestyle? Or was it to rip your hair out and lose sleep investing large sums of money on inventory? Do you value your free time and is growing exponentially worth the monetary risk?

Expanding any business quickly ALWAYS causes a TON of added stress.

Recently, my wife told me that she longed for the good ole days when our business was only making low six figures.

Why?

It’s because things were much easier then. We just had a single employee. Inventory costs were low. We didn’t have much overhead and everything was pretty chill. And most importantly, we were already making enough money to fund our lifestyle.

But the problem was that we never saw eye to eye on this. I always wanted to expand, expand, expand.

However after going through the pain of moving offices and seeing our overhead costs and inventory investments continue to rise year after year, I’ve started to see things from her point of view.

Every aspect of growth causes stress and additional risk. Every employee that you hire. Every new product that you introduce. Every square foot that you invest in your office.

Growth is exciting and challenging but it’s also addictive and all consuming so it’s important to set some boundaries.

Are You Ready To Start An Ecommerce Business?

Bottom line, you need to understand what you are getting into before starting an inventory based ecommerce business.

If you’re not careful, things can quickly escalate into a situation where you have to constantly invest more and more money for product and starve your cash flow even if you’re killing it.

If the goal of your ecommerce business is to improve your lifestyle, I encourage you to take some money off the table and control your growth. Don’t be so focused on making larger bets than you are comfortable with.

Where I Draw The Line

Today, I’m very mindful of anything that could potentially cause unneeded stress. Even if sales at Bumblebee Linens were to hockey stick, I would be very reluctant to take out a loan to fund the inventory.

I have no desire to scale the number of employees we have. In fact, I’m currently working on ways to reduce headcount by leveraging our manufacturers to do more of the heavy lifting.

Instead of increasing the number of SKUs that we carry, I’m looking to drop the slow movers and focus on the winners.

In a nutshell, I’m spending my time on activities that make life easier even if it’s at the expense of short term revenue growth.

I know some of you are shaking your heads at these statements. After all, isn’t the goal of a business to expand and take over the world?

Don’t get me wrong, I haven’t gone soft:). And I still plan on growing my businesses. But I want to do so at a very controlled clip. Growing a business at a steady, manageable pace is fun and relaxing.

Trying to blow things up as quickly as you can? Not so much.

Ready To Get Serious About Starting An Online Business?


If you are really considering starting your own online business, then you have to check out my free mini course on How To Create A Niche Online Store In 5 Easy Steps.

In this 6 day mini course, I reveal the steps that my wife and I took to earn 100 thousand dollars in the span of just a year. Best of all, it's absolutely free!

Share On Facebook
Note: This post above may contain affiliate links, which means that I may receive a commission if you make a purchase when clicking a link. Please consult our privacy policy for more information.

Similar Posts

Have you read these?

21 thoughts on “5 Painstaking Lessons Learned From Managing Inventory and Cash Flow The Wrong Way”

  1. This rings very true to me. I’ve worked in large inventory based business, helped clients in same space and run my own growing e-commerce were I’ve invented, and have contract produced for us. Managing inventory, SKU’s, cash flow, taxes, etc . . . is hard. I watched my father handle this when he ran his own pharmacy and gift shop for 3 decades. (January 2 inventory day comes to mind year after year. . . . .). great article. thx

    1. Hey Ken. Things can easily get out of hand:) During the move, I started to realize that we have a TON of inventory:) And it made me think that we needed to take a step back and make life a little simpler.

  2. This is so timely for me Steve.
    My business just broke six figures last month — on just ONE product.
    It’s going so well the manufacturer came over from Germany to meet me as I am THE source of growth for his business. We have eight more clocks planned for 2017, to bring the total to ten.
    The past week or so I’ve been mulling exactly what you wrote: Am I being to aggressive? Is the business going to be such a money eating machine that I can’t take a penny out? (Which I need to do real soon.) Is this too much growth?
    On the flip side, having just one product to sell I am covering my overhead. Which is actually great news. With more products I will have more overhead for sure, but not 1:1, and each will contribute. Time to squeeze in knocking out numbers on a spreadsheet.
    Once again, thanks so much for your insight!
    Jodie

    1. Congrats Jodie! I remember your company well and cuckoo clocks actually bring back memories of when I was kid. Sounds like your business has reached steady state already and it’s time to cash in on some profits:)

  3. Steve Chou for President!

    All kidding aside, Steve, I think you are such an amazing mentor because you are honest and trustworthy to the core. I’ve been a student of yours for the last two years and in all honesty, no other course I’ve enrolled in has matched yours. It’s not that other people don’t produce good content, but they aren’t you. You have every reader and student’s best interest at heart and I’m honored to be a part of your group.

    Now, as for what you shared here….READ UP PEOPLE. Because what he’s saying is very important. I’ve been selling now for over two years and I’ve never taken one thin dime out of my business (nor taken a loan). And no, the business account isn’t bursting with cash!

    But with that said, I love running my business even with the stressful times, frustrations dealing with Amazon (don’t get me going there!) and learning curves. I’m determined to make this work and find the right combination of product, brand and selling platforms to make a living.

    Thank you, Steve, for always dishing out the realities both good and difficult.

    With respect and gratitude ~
    Ree

    1. Hey Ree,

      You are one of my favorites because you give so much back to the class community. We’ll have to work on the profit extraction part of your business over the holidays:) I hope you have an amazing black friday

  4. Mario says:

    Hi Steve,

    Very interesting article, I didn’t realize of the fact that growing can consume all your cash flow and throw you into a snow ball that you may not be able to stop later.

    If the demand of your products is going up quickly in Amazon, and you don’t want to get into this trap, how can you control that growth without running out of inventory or losing your ranks on Amazon?

    1. Hey Mario,
      There are different ways. You can increase prices. You can control your PPC spend. But most importantly it’s going in with the mentality that it’s ok to run out of inventory from time to time at the expense of not being able to sleep at night because you have so much money tied in your products:)

  5. Excellent analysis and well timed. I recently met with my accountant to get an estimate on what my 2016 tax bill will be. Turned out that even though I’ve been putting a percentage of income aside for taxes, I’ll need more due to having more profits this year. And like you mentioned, I keep buying inventory, but you can’t deduct inventory expenses until they’re sold. I’d recommend all small business owners determine now if they need to make any changes to their allocation to fund their tax bill.

    1. Hey Carole,

      They really need to change the tax laws on inventory. It just doesn’t add up for me

  6. Great post! While I don’t currently have inventory or an online store, my plan is to start one by mid-next year. This is an invaluable lesson that I didn’t event consider (inventory cost not negating taxes). Thanks again!

  7. Brian says:

    I did private label and the reasons cited in here are what have made be reconsider if I want to do ecommerce again or not. The money tied up in inventory at yr end is a killer.

    1. On the flip side, you almost always have this huge influx of cash at the end of the year due to crazy Q4 sales

  8. Manny says:

    Steve, very pertinent for me at the moment which is why I need to drive my own store as the next project and also look to retail as a third channel. The issue being as you say growing at a manageable level, controlling your cashflow while balancing with aggressive growth plans. Its a tough balance. I also toss up whether taking on investment at some point might be an option to help alleviate some of the cashflow issues and grow more quickly.

    1. Hey Manny

      Taking on investment is definitely an option and can be a way to mitigate risk. This of course opens another can of worms:)

  9. Hi Steve,
    There is not a thing that I would disagree. I would add some of my conclusions from running an e-commerce for last 3 years.
    # It is not bad when things are going slower. Its a disease of our times that everything has to go big and fast.

    My husband worried about our slow growth (250% than last year, not that bad, right?)

    And I used to say “there always have to be worst for a while to get better later”.
    And I still believe it’s true, but this “worst” canno’t last too long. After all it’s time to slow down (maybe lower your expectations for a while) and take a look on everything from big perspective.

    Getting things slower allows you to do that. And also to:
    a) optimise your work, and things that are too time consuming
    b) unstress and implement best ideas (not first ideas that are in your mind)
    c) see if what you are doing is getting you to the right point

    I always try to keep this ‘picture’ in my mind: our family (3 kids), enough money that allows us to run a nice, simply life, and a business with a strong bases and great organisation, that bring profits even if we are on holidays.

    And this last part of the ‘picture’ does change a lot and has an impact on every decision we make.

    Great post Steve
    Thanks!

    1. Hey Julita,

      I think it all depends on what your goals are. Admittedly, becoming a family man has changed my values tremendously over the years. If I were single and in my twenties, I’d probably put the pedal to the metal all the time:)

  10. Kacee says:

    I so totally agree with this. Being in ecommerce for a year now, I’m finding that all my cash is being put back into getting enough inventory to keep the business running without interruption. In order to purchase inventory at a decent price, we do need to buy in high volumes, yet still have enough space to keep the products.
    I’m also learning to appreciate the “not-so-fast” times as I use these to optimize the areas of the business that gets neglected in the chaos of fulfilling orders.
    Yet, I’m grateful for the things I’ve learned in the process, the opportunity to control my own life as a business owner, and being able to be in close proximity to my family as opposed to being “stuck at the office” all the time.
    Most of all, I’m grateful for the stronger, wiser, resilient person I’ve become because of this.
    Thanks for all your insight, Steve. It’s made a difference to me and to my family.

    1. Hey Kacee,

      I hear you loud and clear:) The slow times are great for picking up the pieces and optimizing the trail of shortcuts made during the fast times.

  11. Running low on inventory especially on holiday season would mean a disaster to your business. A lot will be affected and of course, lost sales would also mean no profit. Thanks for this very good article.

Leave a Reply

Your email address will not be published. Required fields are marked *