Dealers, Where is the Sweet Spot between Inventory, Cash on Hand and Debt?
ctf_error_coins
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My coin business has grown tremendously this year.
Finally, after years and years of just getting by, running my businesses on a shoestring, I had built up a nice cash reserve with no debt.
Altho my retail inventory is at a new high of about 300K, I have depleted my business cash reserve because of aggressive buying this summer.
I really do not want to get into debt again, but I might be willing to if a big deal comes along.
I feel way more confident buying with cash than getting back into debt.
How do most dealers deal with this? Cash on hand? Line of credit? Go for the debt and using a lenders capital to make money?
Personally, I am more comfortable with Zero Debt and a Cash Reserve.
Now I got to go sell something 
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Comments
Sounds like you have it figured out.
Debt rarely makes sense for me unless the opportunity is extraordinary, interest rate is low and term is short. I've only used debt perhaps twice in 50 years of experience, and it was through family.
The trick is to balance cash needs with inventory and it could be argued that the inventory goal is an empty shelf. But then you got to be able to replace it at a cost at which you can make money. That's the difficult part. And that's why I tell people that the money in this business is made on the buying side. Buy right and you can't lose. Easier said than done.
Absolutely agree that money is made on the Buy side.
That is why I am almost out of (business) cash, LOL
Debt has been my friend since I came out of the womb.
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You can not run a store with an empty shelf
That said, I do understand what you are saying.
Replacement of Unique major error coins is exceptionally difficult
I sell stuff as fast as I get it in. Buying is the key. I don't set up at shows, so I don't need a large inventory. My local area is depressed as far as coins, so I just keep the inventory turning in the shop with fresh stuff weekly. every week whats left over goes to the internet and gone. Plus, some better stuff never gets offered in the store because they wouldn't buy it anyway.
So far I been able to purchase what comes in in most cases. I also have a large dealer affiliate with in 1 hour driving distance to turn larger bullion purchases , etc if I have too.
also, if the need arises, I have two customers who are beyond wealthy that will loan me a few bucks to cover a deal, would just have to toss them a favor or two.
Your friend or your master?
Tough balance depending on how fast you turn inventory. Holding 100K+ individual coins can be draining, although they can sell for large profits. Another factor to consider is how fast are things being offered to you. With our retail front, we can spend $500 a day or $100,000 a day. Back when metals were on fire we could burn through 300K a day in retail buying. Buy nice inventory when you can, but be ready to turn it over quickly when needed.
Debts not a bad thing, when utilized correctly and kept in check.
What concerns me is OCD forcing debt
The key is for you to control it and not let it control you. In spite of what some say, credit cards aren't evil unless your impulsive side overrides your brain.
This is true. Borrow when you really need to and know your limitations. Define your priorities. When debt is incurred, as a high or fix, or as a component of obsessive/compulsion, then it can get very bad and out of hand rather quickly. Especially, when the interest rates on the loan are high.
Sometimes, it’s better to be LUCKY than good. 🍀 🍺👍
My Full Walker Registry Set (1916-1947):
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I suppose there is debt and then there is debt. I run all personal expenditures through credit cards then pay them off when the bill comes. The points get me a free big vacation every two or three years.
But that is probably not the kind of debt we are talking about here...
I do like the sound of constant churning of material as a business plan. Keeps things fresh.
Credit makes enemies; LET'S BE FRIENDS.
In a market where prices have declined significantly over the last 3 or 4 years, one suspects that there may be some trouble ahead for dealers with highly leveraged inventory.
Your posts appear logical, and I know you are in a niche market, and you have asked a good but hard question. I have worked both in industry and currently have my own business.
Inventory turnover ratio
COGS Cost of Goods Sold / Operating Margin
Bottom 10.
Simple terms but hard to objectively measure.
How often does your inventory turn over. For example, if you sell 200 widgets a month, and carry 1000 in stock, then your ratio is (200 / month X 12 months = 2400)/ 12 month / year or 2.4
What should your number be? Some dealers sit on coins for years (turns ratio below 1) others move them quicker. I have seen posted on this site, that coins, like antiques, etc. turns inventory slowly. I don't agree, but that seems to be a common "defense" for poor business practice also. One of the GIANT woke moments for American Manufacturing (Ford, GM, etc.) was learning the Japanese manufacturing models. The US inventory turns ratio was in the 3 - 4 region (average inventory sold within 3 - 4 months). This entailed large warehouses, storage, people to take care of it, etc. Toyota is in the 10 - 11 range. So basically, the American car MFG's were carrying roughly 3X the inventory, and associated costs, which is inefficient.
The lower the ratio, the longer it takes to move material. Simple. Justifying WHY you have a low number instead of figuring out WHY it is so low, is drinking the Kool-aid. When I changed from "traditional" manufacturing to working for Amazon, I was blown away at how fast inventory moves there.
COGS. Everyone dreaded the monthly / quarterly COGS review. All the costs laid out in brutal detail, as well as sales revenues. I saw more than 1 person sacked over trying to cover up costs or padding sales. If you are your own boss, it can be very hard to ruthlessly ascribe all costs. People gloat over the item they bought for $10 and flipped for $500, but don't crow about costs associated with it, and the others they have not sold. Even mundane items like ink cartridges, airport parking, meals eaten at an elevated cost on the road, etc. add up, but tend to be swept under the carpet but they are still costs. This crushes many companies and individual proprietors: Not adequately measuring and facing the true costs of operation.
Bottom 10: What items have been in inventory the longest? What lines have the lowest turns ratio? What items have the lowest margin from a COGS standpoint. Getting the opportunity to stand in front of a crowd, and explain WHY a given set of widgets have not sold in 8 months, or a particular line is turing at 3, when the company average is 16, or why the profit margin on your line is 13% when the company average is 46% can be a cold slap to the face. It is also something that says: "Don't be THAT person the next month!" or you won't be THAT person at the company anymore.
So, it sounds like you have a money making company, but inventoried up at the moment. BAsed on 300K of inventory, and I do NOT want to know the answer, can you figure YOUR ratio? IE 2.4 M sales, 300K inventory = 8 or is it 700K sales with a 300K inventory = 2.3 ? Is your number getting worse or better?
Look at the oldest 10 (Percent, items, etc. whatever). Why are they still there? Are you hoping for a moon shot? Is it really dead inventory but you are afraid to admit it? One of the best things I did for my company was clearing out the dead wood, freeing up the space, admitting the loss, and not doing it again.
Look at your low margin items. Why do you have them. If you only make X%, whereas your average is 12x%, why do you have them? Maybe they used to be higher margin, but the market is saturated and slow, why do you have them? I applied this harshly to myself. I will not purchase an item that I cannot make at least $X or Y%. Period. The number of line items of inventory were slashed. But the survivors turn very good $$ and a very good %.
Enjoy.
Mustangbob, I really appreciate your write up, thank you. I am not a numbers guy, I just found out what works.
I know I am in a unique position than most companies as I have zero widgets. I do hold my coins until the right buyer finds them. It was hard at first with a small inventory. But now with 400 plus certified coins in inventory, the right buyer comes along quite frequently. I have noticed the larger my inventory grows, I find more right buyers if that makes sense.
I do try to flip some coins and I can see doing more of that could possibly help. Only for certain coins tho. Others I will keep in the deserving "museum".
Here is a coin that I just got in for which I Nuke bid to obtain. One of the many coins that blew my cash reserve this summer. I photographed this an hour ago. To my knowledge, It is the only US coin in any denomination to have a huge struck in Blue plastic. Truly a Unique coin in extremely high grade.
These are the types of coins in my inventory. I can never replace it with another one, altho I can replace it with another major error coin. This coin is so awesome, I will do a separate thread on it later.
@mustangmanbob has the post of the year.
Your point about unique items and replacement is a collector's excuse, not a business argument. There is NO point in having a coin sitting for years because it is "irreplaceable". The point is the money not the coin...if you are running a business. An empty spot in inventory and $1k in the bank is heyet than a full spot and $0.
The only argument for not selling your entire inventory, if you could, for $300k immediately is that you want people to keep looking. But even that has limited cachet. People looking and not buying are museum visitors not customers. And if they are buying, then your "irreplaceable" coins are leaving anyway. Just slower
In my humble opinion, there is no argument that favors a lower turn rate.
All comments reflect the opinion of the author, evn when irrefutably accurate.
Inventory = good, cash reserves = even better, debt = very bad
congrats!
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I rarely disagree with you, but I will one this one.
There are many reasons to go this route.
I really do not want to go any deeper in explaining my inner business workings, except to say in the last two days I have gotten two separate random emails messages from two potential clients just absolutely amazed with my inventory. The inventory itself has power and is a bold statement.
You seem to know your market well. Always think and buy like a dealer. Keep your inventory turning over quickly. Don't fall in love with it or start running a museum.
Beware of economic downturns that would quickly wipe out your market. It may be more fragile than you would like to believe.
Avoid debt if at all possible.
Upon more reflection, I realize that I am right about my business model, that is why I had / have a cash reserve.
I Buy any coin that fits my inventory and if I am building (business) cash then I am not Finding the inventory that I need to buy, that is how rare the material is that I deal in.
Eight "I's"
Are you running for president?
I care very much about my business and take it personally, ok?
Now come up with something intelligent, insightful, or inspirational to add to the discussion.
I thank you for your vote
Heh
If you are cash poor so to speak right now because you have been buying a lot of new inventory for your biz, that is ok. There are also going to be times when you are cash heavy because you are not finding much. It comes in waves and as long as you are prepared then everything is ok.
Incurring short term debt to buy a deal that can be resold reasonably quickly is almost always a good deal.
Long term debt is usually a bad deal because it is effectively financing old inventory that is not turning. The cost of maintaining every bit of inventory should be evaluated at the marginal cost of capital.
At least that's the way I look at it.
Doggedly collecting coins of the Central American Republic.
Visit the Society of US Pattern Collectors at USPatterns.com.
You can disagree if you wish, but what is the difference between no inventory and a stagnant inventory?
It's still all about the turn over rate. Otherwise, you're a museum.
If your two emails result in sales, then you ARE turning inventory. If not, you are still running a museum.
You really can't separate the turn from the "clients". Either they are buying or they aren't. If they are, you address turning inventory.
I agree with you that being known as an expert in a niche has value. I agree with you that having cool things to see has value. But the whole point of all of that is to generate sales.
As an extreme example, imagine I buy the 33 double eagle, the king of siam set and a 1913 liberty nickel. I then hit the show circuit. I can do the circuit for years and always have people at my table. But I have to have something at the table that i'm selling or i'm not really a dealer.
If you don't have a reasonable turn rate, you need to ask why.
All comments reflect the opinion of the author, evn when irrefutably accurate.
And, if I may expand my prior post. If I have $25 million in fancy coins attracting eyeballs to turn $100k in other coins per year, that is not a good business model as the carry cost of my advertising inventory is mor than my profit.
All comments reflect the opinion of the author, evn when irrefutably accurate.
Once again, I can not replace what I do sell fast enough, thus the cash.
You are telling me to turn quicker (lowering prices) to build cash that I can not use to buy inventory that is not available. It makes no sense to me.
I do not sell easily replaceable bullion nor Morgan Dollars.
The sweet spot is the one that maximizes profit. The sweetest spot is the one that has no debt.
Maybe they’re not the same, but you just need to figure out your actual goals. Is it security? Income? Peace of mind? I doubt others will know the right formula for you.
Avoid debt. The bids are not plussing at 10 pct per week.
A strong cash position is good. Fast inventory turnover a must.
Then why are you inquiring about taking on debt?
If you are turning inventory faster than you can replenish, you are underpricing your product.
I make money on the turn.
Coins that sit, replaceable or not, do me no good.
If I can't sell something at 30+% profit quickly, I pass.
Unless it's a no-brainer high cash quick flip 5-10% deal.
Just because a coin is unique or possibly irreplaceable doesn't make it a must buy.
In order to take on debt, I would have to be able to profit 75-100% on the deal to consider it.
If you, @ErrorsOnCoins , are having trouble replenishing inventory you may want to consider branching out into other coin areas.....why not try and see what happens?
I'm not telling you to turn quicker, necessarily. I don't know what your turn rate is. But if you are turning slowly, what is the point of taking on debt to buy more inventory that isn't turning over?
What I said, basically, is that I would never delay selling because it is hard to replace the inventory since the entire point is to sell the inventory.
An ideal business has rapid turnover and nearly zero long term inventory. Inventory is a liability as it entails opportunity cost. Inventory funded by debt is a double liability.
If your inventory has been building, which you imply, because of slow turn, you have a business problem. To use numbers:
Let's say i have $100k inventory that I turn once per. That's my baseline. If I increase my inventory to 150k and turn that one per year, then my business is growing. If I increase my inventory to 150k and still only turn $100k per year, then my business is suffering.
I would be better if with a 50k inventory I turn twice per year than a $100k inventory I turn once per year.
All comments reflect the opinion of the author, evn when irrefutably accurate.
Also, please know that I don't mean any of this as a criticism. You asked for the business car.
There are a lot of hobbyist dealers, including myself, who ddo it for fun. My inventory is my collection and vice versa. I have more inventory than is ideal for that reason. But it's not an ideal business model. I just don't care because it's not my main income
All comments reflect the opinion of the author, evn when irrefutably accurate.
Sounds like you are a collector whose coins are for sale. Not so much a dealer. Do you want to go into debt for your collection?
A few things, I am a collector who turned full-time dealer.
I did run out of Business cash but still have personal cash to put into the business before I take on any debt which I plan to avoid.
I do not agree (I may be wrong) with the 100% turn over inventory model.
You say if my inventory is building then I am doing something wrong??? WTF, I have been building inventory on purpose.
I am trying to make a name for myself.
The year-end business goals I set at the beginning of the year were met in the first quarter. I upped my year-end goals and have almost met them in July. My growth rate is scary.
So many dealers are complaining about how hard business is today. I never complain as I find the case to be the opposite.
Maybe I am doing this whole thing wrong, My gut says no. I have been paying myself a salary out of my business for the last two years. I never really did that before as everything always went back into my businesses. I built this business from nothing.
Bottom line, I am having blast doing this and have super awesome coins and the freedom to do what I want to do any day of the week.
Fish On
I’m not sure why you are arguing or defending you view. It seems that you were asking for advice and are getting some big business type feedback.
Age of inventory
Inventory turns
Average return on sales within 30 days versus sales on inventory over 30 days
Free cash generated
Cost of the debt (3% or is it >7%)
State of the market...although sales may be good now, you don’t want to double inventory going into a down market
State of the economy (especially in the region your customers come from)
Opportunity cost of that money (should you diversify, maybe improve website, better camera equipment, advertise), and would any of those help your business more.
These and many other things are the metrics and data that many companies would use to determine if they would take out a loan or determine how much to invest in a product line.
I wouldn’t change your business model if it is working for you. There have been some great responses to your original question and only you can judge what may help you.
Couple of things I would input and I think one is what jmoanzaf is trying to relate.
Keeping unique coins in inventory as advertisement for the coins that you deal in can also be accomplished by having an easily searchable archive on your website(not sure if you have a website or just sell on eBay) If the unique coins can be found in an easy search people who are looking up those items will be directed to your current inventory. Win/win
There was a “dealer” who used to frequent these boards under several alts that had a $20k trophy coin that he used to attract people to his inventory. The only problem was that he believed he needed to keep that coin for whatever reason for advertising and turned down several potential sales for more than double his purchase price. Eventually he sold the coin over the counter at a brick and mortar because he was strapped for cash. Don’t know how much it sold for but doubt he did as well as he could have.
Just a thought on keeping items that are perceived as necessary for your business.
I think a lot of dealers buy and flip items outside of their normal inventory to keep cash moving. If you find a good outlet for widgets or bullion etc that you can flip if the opportunity arises that can be helpful. Even the big boutique dealers have super secret sellers walking shows with boxes of “dreck” that they likely had to purchase with collections or just because they knew they could make a few bucks.
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Like Dave Ramsey says ; " I'd rather have a credit score of "zero" ...not nearing 900. But I use credit... and never abuse it. There is a delicate balance to my "mastery" of debt, ( that's for my friend, Bajjerfan) ... and why it's my friend. I'm not a slave to it. I can quit anytime
.
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I love criticism and feedback, thank you all.
I just know what works for me, but I am not a business major.
Just trying to find the perfect balence of holding some important coins and flipping other less important coins.
In the past when I needed cash, I would flip from the bottom up. That left me with only the good stuff
al cash to put into the business before I take on any debt which I plan to avoid.
I said building inventory if the turn rate is decreasing is bad. Only you know the turnover rate.
You can't really disagree with the turnover model from a business perspective, which I thought is what you were asking. Again, I would read what @mustangmanbob wrote.
You do not need to be bound by business principles. It's your enterprise.
All comments reflect the opinion of the author, evn when irrefutably accurate.
This is what I do not get, You say I am not bound by business principles? Then why the scary growth rate?
Perhaps there are more than one business models that work.
I don't know what your growth is or anything else. You are arguing against turnover rate. There is NO argument against turnover rate. It is possible that your sales increased in proportion to inventory, in which case your turnover isn't dropping and the business is growing. In that case, everything iis good. BUT, if that were the case, where is the cash?
If your inventory is up and your cash is down then either your costs are up or your turnover is down. Neither is a good thing for a business.
Again reread what mustang man had written, including the part about costs. Costs include opportunity costs.
All comments reflect the opinion of the author, evn when irrefutably accurate.
"If your inventory is up and your cash is down then either your costs are up or your turnover is down. Neither is a good thing for a business."
That makes zero sense to me, but thank you for your thoughts.
I do not want to fix what is not broken.
The current market does not support coin biz inventory debt which would be death to any coin business. I try to have a portion of my business investment in cash (say 20-25 pct) don’t want be overloaded with inventory (have more than enough fill my cases at shows). Maintain Zero debt. This reduces selling pressure.
If inventory sales online and shows slow adding more inventory will make situation worse. Problem is the market, summer doldrums, lack of money on part of potential buyers. Save your cash for when you can buy below bid (nice material you can retail) or for projects you can acquire at your price immediately flip at 50 pct profit or more.
No, actually I keep narrowing what I sell.
I want to be the single best source of super eye appealing major error coins in the price range that I deal in.
I do believe I have hit that goal.
If that doesn't make sense, there's no point in discussing it.
If you don't wasnt to change anything, why even ask the question?
Mustang man gave us a short course on business. You are arguing against it.
If you have 100k in annual sales and 100k in inventory, your turnover is 1. If your inventory is 300k and sales are 300k, that is growth and your turnover is 1. In both cases, there should be a steady state between cash and inventory.
If you went from 100k in inventory to 300 k in inventory and sales only increased to 150k, then your turnover dropped. You are then less profitable than you would be because of the carry cost of the inventory.
Short summer summary: inventory should not grow faster than sales
All comments reflect the opinion of the author, evn when irrefutably accurate.