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Every Friday, I post a small insight into running Curio City and/or Blue Hills Editorial Services. My most recent posts are directly below. You can also start with the first post, or use the subject labels to the right to home in on particular topics. Feel free to comment on anything that interests you.
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Friday, September 29, 2006

Good Debt, Bad Debt

I mentioned in Kraken Enterprises Begins that I’m trying to become profitable without taking on debt.

So far, it’s been easy enough to avoid borrowing. My startup cash is dribbling away on schedule. Now, though, I’ve hit an unexpected sales slump just as I need cash to buy Christmas merchandise. Revenue was supposed to increase steadily throughout September. Instead, it's coming in as my worst month yet. My open-to-buy is stubbornly stuck in negative numbers again.

No merchandise, no sales.

Most established stores buy their merchandise on “net” terms. That means that they place an order, and then have a defined amount of time from the ship date (usually 30 days) to pay the bill. Net terms let you sell some of the merchandise before the bill comes due. It’s a nice cash-flow trick for high-volume stores.

Curio City Online has net billing terms with a few vendors, but, like most small accounts, I usually prepay orders via credit card. Disregarding the float between the time the order is placed and the time payment is due (determined by the statement period, rather than the order’s ship date), I effectively have to pay for my stock before I can sell it.

Right now, I’d like to bring in some Halloween and autumn-themed things, but I have no open-to-buy. I do have a credit card with a high limit and no balance. It’s dangerous thinking: I can’t remember the last time I failed to pay off a monthly charge bill. If I start using deficit financing now, my open-to-buy might never return to black numbers again, interest charges will erode my markup, and I’ll be in a death spiral.

When is debt a good thing?

Debt makes sense as an investment in something that will pay off in the long run – a mortgage, education, home improvements, or business expansion. Debt is wrong when it’s used for consumption, or to subsidize routine expenses.

Going into debt for merchandise straddles that line. If I’d borrowed ahead in August in anticipation of a September sales recovery, I’d be deeper in the hole and racking up interest charges right now.

I’m fairly sure that I can service any debt incurred in October with increased November and December sales. If those don’t materialize, I’m sunk anyway. Next week I will repurpose some of my remaining Phase 2 startup cash to buy new inventory, and run up some credit card debt to replenish some depleted items (such as my magnetic globes and winestoppers). You have to spend money to make money, right?

Long-term, I will take out a bank loan to either (a) expand and revamp Curio City Online after Phase 3; or (b) open a physical Curio City store – depending on which way I ultimately go. I need to show a profit before I’m comfortable with doing that, though. I am not going to borrow money for a losing business.

Other Forthcoming Topics:

  • The Royal We
  • Where Money Comes From
  • Long-term Prospects
  • Planned features
  • O, Canada

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