Friday, February 12

Liquid Assets

In the publishing business you want to do two things: make stuff (in my case board games) and make money. If you're honest you're doing thing A to do thing B.

But the whole process is cyclical. You can't make games without some money to buy them (and pay for the artwork and marketing), and you can't make money without games to sell.

Publishing is one of those businesses where you have to shell out a lot of cash up front. I pay my artists before the game has been manufactured. I pay my manufacturer before I've sold more than a handful of copies.

For the last three years my company has been profitable, i.e. it's worth more now than it was last year, and so on. All sounds fantastic doesn't it? The problem is that my assets are mostly stock. Stock is not a liquid asset. What's a liquid asset? According to Wikipedia:

A liquid asset has some or more of the following features. It can be sold rapidly, with minimal loss of value, any time within market hours. The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times.

Clearly I can't just sell all my stock instantly at full price, it takes time to sell stock, so stock is not very liquid. Why is this a problem? If I receive an excellent prototype tomorrow that I want to make immediately I need to be able to pay for it. The manufacturer will only accept cash, so I need lots of cash on hand to fund the manufacture of my next game. If all my assets are stock then I can't make another game until I've sold enough to fund the next game.

Of course, the other problem with stock is you don't know how much it's worth. You know what you paid for it. You know what it could be worth if you sold it all at full price, whole sale price or even the average price of your sales to date. But you don't know how many you can sell. You might have sold the last game you will ever sell yesterday and all your stock is all firewood. Or worse: firewood you are paying to warehouse.

What can you do to avoid this problem? Probably the easiest thing is not over-produce. If you order 5,000 games and only sell 1,500 then you're in trouble. If you produce 1,500 and sell 1,500 you're on to a winner. The problem there of course is that the more copies you make the better your profit margins or the cheaper the final product - which could lead to more sales.

Another thing you can do is try to drive sales early. The faster you sell your games the sooner you turn them into cash that can be re-invested into new games. It's probably worth making less money sooner than more money later.

2 comments:

Michael said...

Jack - I like this post. I pondered this publicly in my post optimizing for cash flow or total profit. I say hands down, cash flow wins the day!

Jack said...

Hiya Michael,

Yeah, I think you're definitely right there. The next thing I need to do is focus on converting my stock into cash as quickly as I can so I've got cash on hand to invest in the next big thing.

Cheers,

Jack