I love business and at heart, I am a bootstrapping entrepreneur. If you are not familiar with the term, a bootstrapper is one that builds lean, while watching expenses carefully and avoiding debt and other leverage. Even now, I think so lean that I wear a lot of hats that might surprise many people. For example, I still do the bulk of our software coding to this day.
If you take a cursory look around at the business landscape, you might wonder if bootstrapping is extinct. You read about companies raising money, sometimes huge money, when they barely even have a product to sell. They are all about growing fast enough to get acquired before they burn all their cash.
Yes, these are the companies that get the attention, but that is not where I am and probably not where you are. The vast majority of successful American businesses are successful because of bootstrapping owners who invest their own sweat equity and money. These are the true giants in American commerce. My hat is off to them.
That being said, running a business is hard. Very hard in fact. Even when you see success, if you are not very careful, you can end up with destruction in your personal life. Successful businesses can wreck marriages, ruin relationships, and cause immense emotional damage to owners. If you are wise, you will pay attention to this danger.
So what does this have to do with inventory? As it turns out, a lot. As I have noted in previous articles, inventory is a huge cash flow problem, especially for fast-growing businesses. If your business is generating $1 million in income/year but the inventory cost is rising $2 million/year, you are not going to feel like you are making money. In fact, you may feel very broke.
The stress from rising inventory cost is real and it takes a big toll emotionally. I am going to take off my business hat for a moment and give you another way of managing cash to consider, especially if you are in a stable or growing business. This is a strategy I have learned to use personally. Here it is:
Pay yourself first
It sounds simple and often counterintuitive but let me explain it. If you are in a fast-growing business, it is very easy to want to keep all cash invested in inventory, especially if you are increasing your margin when you buy a lot of inventory. For example, you might be in a situation where you can purchase on sale occasionally, and if you are doing well and have the cash, it can be tempting to buy big when those sales come around.
Trust me, I get that way of thinking. If you can buy 10 more points of margin just by purchasing a few more months of inventory, that is easy profit and it is going to be hard to turn that down. The problem is that based on my experience, if you think that way, you will never have cash. There will always be a reason to invest cash in inventory. Your profits could be soaring even while you have no money in your bank account.
Paying yourself first instead of last is an acknowledgment that there are some things in life that are worth more than squeezing a few more dollars out of your inventory. If you postpone paying yourself, you may keep building profits but never get around to enjoying them. You live just once. Don’t be miserable because you have no cash when in reality, all you have to do is put your hand under the spigot and grab some. Don’t make your spouse live that way either.
How much should you pay yourself? That is sort of a hard question. Pay yourself enough so that you are comfortable if you can. If you are wildly successful, pay yourself enough to enjoy your success. These payments can be payroll or company distributions; that is between you and your accountant (how to pay yourself). But pay yourself enough to enjoy your life. Don’t let the cost of inventory diminish your quality of life.
The reality is that we can talk inventory formulas and numbers a long time, but at the end of the day, it won’t matter a whole bunch if you don’t enjoy your success. Listen to me on that; I have learned the hard way.