This is a challenge that every retail store that carries inventory that might be seasonal will have to face. You have one snow shovel left and it is already late winter. It isn’t likely that you will get any more significant snow, but it is possible. Over the last few months you have been selling 5 snow shovels or more every time it snows more than 4 inches. So the big question is this. Do you order more snow shovels? The smallest order you can make from your supplier is 10 units and they cost $10 from your supplier and you sell them for $20.
Now that we have the relevant numbers let’s do some math.
Estimate the Percentage Odds of Selling all 10 Shovels = 20%
Cost to Store Shovels Until Next Winter = $10
Cost of Capital (Interest Rate You Pay for a Business Loan) = 7%
So your most likely scenario is to sell 2 of the 10 shovels (20% x 10 shovels) which would give you $20 in profit. But then you would have 8 shovels left that you would have to store until next year which we are assuming costs $10. Then you should also take into account how much it cost to use the extra $80 to purchase those additional shovels. To do this you should take what % you might pay on a business loan to use that $80 that could have otherwise been used to pay down a loan balance. So let’s take $80 x 7% = $5.60. So between storage costs and interest costs you have spent $15.60 to make $20 in profit.
Lastly, you should consider what you could have used those funds for instead. If you didn’t buy the shovels you could have bought more garden shovels to prepare for Spring time. You could have recycled that money several times over to buy new inventory, sell it, and purchase more inventory again. You could have turned that $80 into $240 over the next 9 months.
So there is not perfect answer that fits all situations, but this is the process you should probably think through at some level when trying to determine whether or not to buy more inventory for your seasonal retail shop.
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