Don’t Buy Tens of Thousands of Inventory When You Haven’t Even Got Orders Yet
In the past few days, I’ve been talking about lessons I’ve learnt from various entrepreneurial reality TV shows.
Yesterday, I talked about Dragons’ Den UK, and I mentioned 3 factors that influenced investors to be interested in a business pitch.
How Important is Inventory for a Start Up Business
Another very serious aspect of starting up your own business or social enterprise regards your inventory (you may call it your stock). This is particularly relevant for ventures that involve the sale of products, as opposed to services.
I talked yesterday about Dragons asking entrepreneurs about their balance sheet. A number of them unfortunately replied that they have losses or debt in the tens of thousands of dollars! Many entrepreneurs try to hide this fact. They start off their pitch confident, while glossing over this fact. But after some grilling by the investors, the truth comes out. The Dragon investors do not like discovering this situation at all.
How Your Start Up Business Can Lose Money Fast
Now I didn’t go into much detail about why they are in debt or facing major losses. Today I wanted to go into detail about one reason that stood out for me, and I want to warn other entrepreneurs about this danger.
When the investors ask some of the entrepreneurs about why their businesses are losing so much money, many of them reply that the reason is because the entrepreneur has bought tens and thousands of products for their inventory. These entrepreneurs believe that in order to increase their sales and profitability, they must buy a warehouse full of stock. In their opinion, once they have more stock, more customers will buy from them.
How NOT to Sell Your Products
At hearing this explanation from the entrepreneurs, many of the investors shake their heads in disbelief. You can see the shock in their faces! In the view of the investors, this is not the best way to approach starting up a product based business.
What You Should Do as a Start Up Enterprise
Rather, the investors suggest that start up entrepreneurs should make only one prototype or just a few samples of their product at a small cost. There is no need to buy truck loads of inventory when no one has offered to buy them yet! This can be a waste of money, and a permanent drain on the company.
Entrepreneurs can then approach potential large business clients to make sales or they can begin trying to sell the samples themself. If the sales of the samples have turned out to have given a positive response, with increased demand, then the entrepreneur can go out and purchase slightly more inventory to fill the need. If entrepreneurs have made a sale to a large business client, then they can set up a contract for the order which they can then use to help finance the purchase of more inventory.
Prioritising Growing Your Sales Rather Than Inventory
It seems that quite a number of entrepreneurs have focused more on building inventory, rather than on growing sales. This could be the wrong priority for their start up enterprise. It can cost tens of thousands of dollars if you do this, without any guarantee or high probability of a return!
In the view of the multimillionaire investors, this is how many start up ventures quickly fail or end in bankruptcy.
Warning: Don’t let this happen to you!