So I have a very close personal friend that is in his third month of selling online. During dinner last night, an interesting topic came up. He was in the midst of setting up his repricer and he was noticing that some of his older products were no longer profitable.
So the question was asked:
Should I sell those items for a lose or hold out for a miracle?
I have to say that this is a very good question and one that we ended up chatting about for a few hours.
What would you do?
Would you sell to liquidate your products to get cash?
Or are you someone who sets a prices and won’t budge even if the cast of Sister Act started singing to you.
Do you want my answer?
Well you are going to be pissed.
Yep. My gold standard for answers. It’s one of the most important things I learned in all of my economics classes.
The answer should almost always be: It depends.
Until I can collect all of the information about your business, account, and cash flow, I can’t actually tell you what is the best thing for you to do.
In the case of my friend, here was the advice I gave him:
His current profit margin on his items is around 60% with an overall business profit margin of 36%. That means for every dollar he spends on inventory, he makes $0.60 for his business – then after costs such as software, taxes, etc, he makes around $0.36 per dollar invested.
If you could replicate that in the stock market, you could retire in a few years.
Now looking at the amount of his older inventory, we were able to estimate that it was tying up around $1,000 in cash (at the current selling price).
So taking some basic calculations, we could estimate that if we liquidated everything and were able to generate $1,000 in cash flow, we could make $360 by investing it into new inventory.
Now for the fun part.
The total amount he invested into this inventory was around $2,000.
So – It looks like a big flat loss of $1,000 if he liquidates (assuming he didn’t reinvest to make the $360).
Take a guess what my recommendation was….
Well. You can’t.
There is still another missing piece to the puzzle.
If we look back at the option of liquidating the inventory, we see that there is a possibility for income from the remaining $1,000.
The key factor that we have to examine is the inventory turnover factor a.k.a how fast you can sell your inventory.
If you can turn over your inventory every 2 weeks, we can assume it will take you 6 weeks (actually less if you reinvest all of your revenue into additional inventory).
If you can turn over your inventory once every 2 months, we can assume it will take you 6 months to recoup your loss.
See what we are doing there? We are taking some a few different measurements and turning them into something that can actually that can provide us a lot of insight.
Looking at my friend’s account, we were able to estimate the average inventory turnover at 3 weeks.
With all of this information, I was able to recommend that he should liquidate the old inventory and invest the cash into higher returning inventory.
So – What would have you done? What if it was your account? Do you have an idea of these key numbers?
Let me know what you think below.