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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, June 28, 2013

Dropships Drop My OTB

I’m selling so many bird kites as dropships this summer that my open-to-buy (OTB) is freaking out. For those who are just joining us, a “dropship” is not a cool planetary assault vehicle like the one pictured above, but the far more prosaic practice of having a vendor ship an order directly to my customer instead of to me.

A proper OTB calculation is a fiddly fussy formula that’s way more complicated than my low-budget one-man operation needs. My OTB simply tallies up the average cost of merchandise as I sell it and subtracts what I spend on orders. If I sell $100 worth of stuff in a day and my average cost is 50.4%, then that increases my OTB by $50.40. 

My little formula includes the inbound freight charges that I pay to vendors, but not the amount collected and spent on outbound shipping to customers because those don’t affect the cost of replacing my inventory. But dropships are different. I still collect a shipping charge from the customer, but instead of paying it out as a postage line-item that offsets shipping income, I pay the vendor to ship the kite to the customer. That reduces my nominal shipping expenses while increasing the cost of the merchandise.  

Things go out of whack when dropships become a substantial part of my sales. Everything’s fine if $100 worth of kites actually costs the average $50.40. But if I pay the vendor $50.40 for the merchandise plus $15 to ship it to the customer, my OTB gets reduced by $65.40. The more I dropship, the more my OTB falls. A lot of dropships in May and June drove today’s OTB to negative $293. 

Now, this is just a bookkeeping problem; I did collect $15.60 from the customer to ship the kite. But that $15.60 gets added to my shipping income without a corresponding hit to my shipping expenses. Over the same six-week period in May/June I took in $914 in shipping fees and paid out $634 in postage, yielding a $280 surplus…which very nearly cancels the OTB shortfall. Zero isn’t exactly what I’m striving for here, but it’s better than negative.

After pondering lots of possible fixes, I decided that only adding a new column (“Dropship shipping”) directly into my OTB is going to work -- a disappointingly obvious solution, perhaps, but it’s a big deal to me. Every time I tweak my Accounting spreadsheet, year-over-year comparisons are compromised.  

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