Stacks of orders

If we could have stacked them in a pile, our backorder sheets in August 1994 would have made a column 13 feet high!

When Sarita and I first started our business, we operated it according to the principles we had learned concerning debt.

We had no debt. We never considered acquiring any. We didn’t want any. As I explained in my last post, if cleanliness is next to godliness, then debt, for us, was the next thing to sinfulness.

Further, beyond any of the emotional appeals or the lessons we had imbibed throughout our growing up years, we knew that cash worked just fine. And it kept expenses low. (No interest payments!)

But then . . .

*******

In 1994, our business was growing like crazy. We were enjoying our fourth straight year of nearly 100% growth (i.e., sales were doubling every year).

Past experience said that during the months when sales were strong (mid-April through mid-September), our positive cash flow would be amazing. By mid-September, our bank account would be overflowing with money.

Beginning in October, we would enjoy a few months where expenses more or less equaled income. But beginning in late December, when we took a distribution equal to a tenth of our profits (so we could give it to charity and enjoy a tax deduction), the tide would turn. Decisively.

After the December tithe distribution, we would have taxes to pay. And we would have to pay to print and mail a new catalog. And by late January/early February, we would begin buying inventory for our next sales season. There would be lots of expenses, relatively few sales.

By mid-March, the bank account would be almost empty and we would begin wondering if and how we would survive past April 1st when the new sales season began.

March was—I don’t want to say terrifying, but— . . . it sure was scary!

Every March, I found myself wondering: What do we do if sales don’t pick up quickly enough? Or if our growth pattern doesn’t hold true?

At that time in our company’s history—and this held true for many years—sales each month from October through March were generally about 1x. April, things would pick up: 2x. May, 4x. June, 6x. July and August, about 12x each. September: back down to 6x. And then we started the cycle all over again.

That sales cycle created another scary scenario. To understand the problem, I need to share two more numbers.

  • Our average cost of goods at the time—what we had to pay in order to acquire the books we planned to sell—was right about 50% of our selling price. Which means that all of our other expenses—the cost of equipment, rent, supplies, shipping fees, insurance . . . oh, and payroll for our employees!—had to come out of the “other” half of our selling price, what business people call the “gross profits.” After paying for everything else and paying our employees, Sarita and I just hoped there would be enough money left to pay ourselves. We were convinced—and still are—that everybody else had to come first. Referencing Psalm 15:4, righteous people “keep their promises even when it hurts.”
  • Our vendors—the people who sold us our inventory—generally sold us things “Net 30”—i.e., they would ship us the books we needed with the understanding that we would pay them within 30 days from the time the books left their warehouse. It was the same deal they gave all their other vendors. But when you’re relying on your sales to pay for the books you are selling, that meant we had only about three weeks from the time we received the books till we had to pay for them. (Question just for fun: Was that “Net 30” payment plan a form of borrowing on our part?)

Again, we are honorable people. And when we give our word, we do everything in our power to keep it. So we established a policy that we would pay “on time at worst.”

With such values, policies and practices in place, we figured it was the best part of valor always to wait as long as we thought it reasonable before we would place an order for new inventory.

Sometimes—actually, far too often, especially in the middle of the summer (which, of course, was our busiest season)—as we placed our orders, the person taking our order would say: “I’m sorry. That item is out of stock. We won’t have more until ____”—and the date was sometimes two to three months, or, in a few cases, nine months or more in the future).

And, of course, even for those titles that they had in stock, it usually took a few days for them to put our orders together and ship them to us.

All of these factors, together, meant that we were usually in pretty good shape to ship full orders from about mid-October through March (our slow season), but by late April, we would begin to experience backorders, and by August—when the cost of the books we were selling in that one month alone would equal our entire gross profits from the previous year—things would get completely out of hand.

We would order in early July, hoping sales from July would cover the cost of books we would sell in August, and the publishers, often, “simply” had no books left. Their major selling season was several months away, and they didn’t want to carry the extra titles through their slow period!

And that’s what happened in the summer of 1994. Things were so bad, we weren’t sure how we could survive.

We were buried with orders. (What a great problem to have!) But by August, our warehouse had only a third of the titles we needed to fill the orders.

I’m not talking about having only a third of the total number of books we needed. I’m talking about having only a third of the titles we needed. I mean, if you ordered a complete curriculum from us composed of 45 or 50 books, we likely had only 13 to 18 of them in stock.

What a nightmare!

Not only could we not ship complete orders, but we had to face the ire of hundreds of customers. Our phone was ringing off the hook. “Where are my books?!?”

And while—and because—we couldn’t handle the orders, we couldn’t handle the phone calls, either.

We had three office staff at the time. Soon they could do nothing but answer the phone. But we needed them to do other work, and we lacked space to add more staff to take the calls. (And besides, who would train the new staff to handle phone calls when our current staff was already stretched beyond capacity?)

I finally lit on the idea to hire the Denver Metro area’s largest phone answering service—just so they could provide some human voice on the other end of the line when somebody called. They wouldn’t be able to answer any serious questions, but they could at least explain our straits and stem the flood of calls into our office. . . .

Twenty-four hours after the answering service agreed to take our calls, they called to say they couldn’t handle our account. The load was too great. They had pulled all of their staff, including the receptionist, in hopes of handling the deluge, and they couldn’t do it.

So they resigned our account and left us to fend for ourselves.

The entire scenario seemed hopeless.

Things were so bad, I seriously considered returning new orders unopened: “We can’t handle the orders we have already; how dare we accept more orders?” I asked.

It didn’t take me too long to realize that returning the orders unopened would actually only create more problems, since those who had placed their orders, who were depending on us for their homeschool supplies, would have no idea why their letters came back. So they would call. And then what would we do?

“We’ll just have to muddle through,” I concluded.

Our software at the time couldn’t handle backorders, so our warehouse staff had to take copies of the packing lists and manually check off all shipped items so we could ship the backordered items later (when, God willing, the vendors would finally ship the materials we had ordered from them!).

By the time the phones calmed down and the new orders stopped flooding in, I measured the stacks of backorders we still had to ship. If we could have stacked them in one pile, they would have made a column 13 feet high!

*******

Fast forward about five months to February of 1995.

I was talking with Pete Smit, a banker who had befriended me and taken me under his wing. He like a kindly grandfather to me. Caring. Trustworthy. . . .

The crisis of the previous year was long over, but Sarita and I knew we were about to face the same issues again.

I don’t know why I told Pete the story. I know it wasn’t because I was hoping the bank might help. I was under no illusions about that happening! The bank, to me, was simply a place to store money in between transactions: money in; money out.

I think it must have talked with him about the situation because I had come to trust him as someone who had “seen it all” in the business world, and maybe he would have some idea of what other business owners might do in similar circumstances.

When I finished my tale, he said, “John: The problems you’ve told me about? They are exactly what lines of credit are for!”

“‘Lines of credit’?” I asked.

“Yes. We agree on how much money you think you may need in the coming year—so you can avoid the problems you have been facing—and then we create a line of credit, a contract: you can borrow up to that amount of money when you need it and as long as you need it. If you need funds for only a week or two: fine. If you need them for several months, that’s fine, too. . . . We charge you a fee for creating the line and setting the funds aside, but then, when you need cash, you know you will always have what you need.”

It suddenly dawned on me: If Sarita and I continued down our path of “cash only,” we could avoid paying interest. But that would condemn us to anxiety in March, sky-high expenses later in the year due to backorders, and horrible relations with our customers (which would create serious negative repercussions for future sales, since the best kinds of sales are from happy customers who tell their friends what a great company yours is).

I calculated that, if, the previous year, we had had enough inventory on hand to ship all our orders complete the first time, we would have saved over $200,000 in shipping costs and employee time (not to mention shipping materials) alone.

And Pete was offering me the opportunity to put all those difficulties behind me at a cost of twenty to thirty thousand dollars of interest and fees.

I was looking at an easy ten-to-one return on investment. For a loan that we would pay off in a few months.

It sure sounded like a no-brainer to me!

Needless to say, Sarita and I signed up for that line of credit as quickly as possible . . . and have maintained a line of credit ever since . . . for exactly those reasons.

We save money, avoid heartache, and avoid a whole lot of other problems by borrowing money . . . at interest.

I decided that was good debt. No. Not just good. It was great debt! How wonderful I could borrow the money!

But why had no one taught me that debt could be good? Why did I have to learn that from a banker only after I had experienced two or three years of near terror in March, massive and unnecessary shipping costs, and customer service problems I wouldn’t have wished on any customer and certainly didn’t want to face as a business owner?

Next time: Debt: Good, Bad, and In Between.