Life lessons in business: Investing

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In this series about business, I have spent a lot of time talking about the bootstrapping mindset. The bootstrapping mindset basically means you grow organically, avoiding debt and investors. In other words, you buy things when you can afford them, you don’t splurge, you don’t try to act like a big company when you are a small company, and you don’t take enormous risks.

I am a bootstrapper and I love bootstrapping. To me, bootstrapping is more than good business sense; it is good life sense. I don’t want to have problems sleeping at night because I don’t have money to make debt payments. I don’t want to be a servant to investors who yank me around like a puppet either.

Here is the problem though: businesses need money. You cannot take bootstrapping to an extreme or you will either kill your business or stifle it. If you see something that your business really needs, you have to pull the trigger and make the investment. To not do so is not a viable option. Sometimes, that means taking a risk you may not find very comfortable.

Let me give you a very simple example. The kids ship over 500 different products from our warehouse and that means they need to invest in inventory. Inventory is a tricky problem and here is why. If you have too little on the shelves, your customers end up waiting longer for some orders because you run out of things and have to get shipments yourself before you can fill orders. On the other hand, if you keep too much inventory on the shelves, you tie up too much cash in inventory.

Let’s look at this with real numbers. Here are viable strategies we could utilize in their business:

  1. Keep nothing on the shelves but just place orders for what we sell and ship them a day or two later when we receive those orders from the manufacturer. This ties up no cash but means our customers are waiting longer to get their orders. It also reduces our gross margins to the minimum.
  2. Keep maybe a month of inventory on the shelves which will eliminate most of the shortages but forces us to tie up cash in inventory roughly equal to a full month of sales. (For example, if we are selling $1000,000/month and our gross margin is 35%, we are tying up $65,000 in cash.)
  3. Get very aggressive on buying inventory to maximize our profit. For example, if the manufacturer runs specials on products, when those products are on sale, we need to be willing to load up on enough of them to last us until the next sale. That means that we might have 4-5 months of inventory on some products and across the board, average maybe 3 months of inventory across the entire line. As you can imagine, the cost to carry that inventory is enormous.

You might wonder which of these three options we go with and I will say I am all in on option 3. I want to maximize profits. Option 3 increases our gross margin substantially. (I will not say how much here because I might have competitors reading.)

The drawback to that extra profit is I have to be willing to keep a lot of money tied up. There are problems with that. First of all, all money that is tied up has opportunity cost associated with it. In other words, you need to consider what opportunities you might be missing out on because you are tying up that much money and can’t spend it on something else. Or, very typically, that money may have to be borrowed and if so, you need to make sure the increased profit is worthwhile when compared to the interest cost.

I cannot tell you how much I have had to grow in this area. I was scared to death to buy anything in the early days of my business but before long, I had to start writing some big checks. Even when working out of a basement in a small house in the early days, I can remember writing checks for $100,000 to buy a tractor trailer full of a particular product we sold. I was comfortable doing it because I knew we would sell it. We had numbers to back up the decision.

Let’s be honest. I have also made plenty of investments that were too risky and outside of the spirit of bootstrapping. I have bought products that I thought I could sell but couldn’t. I have been talked into buying expensive services that turned out to be a waste of money. If I am being very honest, there are far more of those kinds of stories that I would like to admit.

Business is full of landmines. You cannot imagine how many other businesses will try to sell you advertising or software or inventory or about anything else you can imagine. Be wary and do your research. It is easy to get taken advantage of in your personal life but it is infinitely easier and the stakes are higher in the scope of business. After you get burned maybe 1,000 times like me, you really start liking bootstrapping even more.

In spite of all that, your success will be largely determined by your willingness to pull the trigger at the right time and the moral of the story is that you have to invest to grow a business. You can’t blink and talk yourself out of every purchasing decision. Bootstrapping is not about fear. Bootstrapping is about smart investing and controlled investing. If you have done your homework and an investment makes good sense and is within your capacity to handle if things go wrong (though it may hurt), pull the trigger and don’t look back.