A Truck Full of Melons -- Dickeson
I have a truck with a load capacity of 1,000 melons. There’s an area near the Mexican border where they grow the most delicious honeydews you’ve ever tasted.
In addition to my truck I have $1,000 in free cash. Being an entrepreneur, I drive my truck to that border spot and buy a thousand melons from the farmers for a dollar a piece. I head straight to Phoenix where I sell the honeydews to the wholesaler for $1.50 each. I’ve just made $500 gross profit. But the trip cost me $250 for expenses. So I netted $250 on my free cash in two days!
That’s a 17 percent return on sales and a 25 percent return on my cash. I repeat the trip. Now I have $500 and a 50 percent return on cash. Suppose I do that 20 times and wind up with $5,000. I’ve earned 500 percent on my original thousand.
What’s illustrated by this crude example is the value of inventory turnover. The more times we turn inventory over, the more cash we take to the bank. The faster we turn over our cash, our liquid resource, the greater the profit. Does it really work that way?
Sam Walton knew it did and built Walmart, the largest retail business in the country—maybe the world—by increasing turnover velocity. With a computer system and intense concentration on rolling over his stock of goods, the lower he dropped his prices, the more merchandise he sold, and the faster he sold it. He became a volume billionaire.
Another benefit Walmart has is its accounts receivable. They don’t have any. Walmart sells for cash. As commercial printers we have both raw materials inventory and accounts receivable to slow our turnover profitability. On average, per the Messrs. Margolis in the Printing Industries of America Ratio Studies, we printers turn our inventories 12 times a year and our receivables eight times.