You gotta keep things moving

Some turnover is not so good: Employee turnover that is too high or customer turnover above the normal amount. And, some turnover is good: inventory turnover, the turnover of sales, and those sweet little pastry turnovers (which have nothing to do with this blog post).

When a small business owner is pricing their products, it can be tempting to price those products at the upper limit of customer’s perceived value. The thinking is, why charge $300 for this product if a customer will pay as much as $500?

It makes sense. Unfortunately, it can be dangerous. That’s because of the important concept of cash flow. Earning revenue is good, and earning high revenue is even better, but having cash flow is the best. Cash flow, even if it is less than your ideal revenue range, makes business a lot easier. You’ll be able to keep your debts current, you’ll be able to meet your obligations when they arise (and not get saddled with debt or late fees), and you’ll have capital to operate while minimizing your need for loans.

If I have two customers who will pay $500 in the month for my product (from the example above, I’ll earn $1000. But as long as each item is profitable, it’s potentially wiser to lower your price to $300 if it means that you’ll get 3 customers buying. That’s 3 payments in the month. Yes, they will total only $900 but you’ve got the magical cash flow.

It’s actually similar on a larger scale in the global economy. During healthy economic times, money is flowing all around and that’s good. But during lean times (recessions, depressions, etc.) there is a lack of money in the marketplace and it doesn’t move around very quickly.

The same idea goes for inventory. Stocking too much inventory creates risks: For example, you might think that you’re preparing for busier times but there are ongoing inventory costs and the threat of theft and fire (and the reality of associated insurance costs), and wastage (in the case of perishable inventory). Not only that, what happens if your product is suddenly made obsolete in the marketplace? You’ll end up with a warehouse full of old items.

This is a huge topic and there is barely room to scratch the surface in this blog. But the most important thing to know is this: You gotta keep things moving!

Jessica Routier, IAC-EZ