In year 11+12, I studied accounting. It wasn’t the most interesting of subjects to me, but I did very well in it. The teacher was Mr Read, who was a brilliant accounting teacher. He breathed life into what could have been a very dull topic to study. There were always plenty of anecdotes to amuse us as we learnt. For instance at a time when most of the classrooms were being switched from blackboards to whiteboards, he joked that the accounting department would be resisting the switch, as while teachers got chalk on their clothes, they could claim drycleaning as a work expense.
And he imparted his theory of retail, which was that ideally if you sold goods, you’d never have to handle the goods, let alone sink massive amounts of money into running a warehouse to hold it. Instead you’d take the orders and ship the goods directly from the supplier to the customer.
I don’t know where Mr Read is now, but he’d probably be thrilled at the prospect of today’s information industries, where Apple and others can sell a digital copy of a song (plus a licence to own it) and make millions from it.
Of course many industries continue to have to stock their products on shelves, in warehouses, in crates. Sometimes I ponder just how much money is tied up in the stock that shops hold. For supermarkets, they could have millions of dollars of stock just sitting around in a single supermarket. Even a small shop could easily have tens of thousands of dollars.
Makes me ponder if I’ve got enough money on my home contents insurance.
4 replies on “Stock”
We recently looked at our contents insurance and were amazed we had under valued our contents by roughly half. A bit of shopping around though and we ended up with better cover for the same price.
“On your bikes, boys.”
“Never, never, never lend any money. And always borrow as much as you can. If you die tomorrow you end up that much ahead.”
“Open up your books to page 45, gentlemen.”
And many other memorable quotes that won’t mean anything to anyone who never had Mr. Read.
Of course if you can sell the stock before you pay for it then working capital is actually negative. In many case supermarkets will return stuff that doesnt sell so they shouldnt end up with large inventories.
As for the insurance, our agent suggests 20% of the value of the house and land as an approximate valuation
As for assessing insurance, one could set the figure (at diminishing insured amount) to:
1. New replacement value
2. Second-hand replacement or
3. Replacement of only necessary items
If 3 is a low number then self-insurance is viable. Why give the insurance companies free capital for them to invest YOUR money at their gain when you could obtain such returns on the money yourself.
Insurance is only worthwhile where (i) the consequences are grievous (ii) the risk is high.
If the risk is high then the insurance premium is also likely to high, unless there’s something that you know but the insurance company doesn’t. But it still might make sense to cough up.
On the other hand if the consequences are grievous but the probability is tiny then you should definitely insure since the premium is likely to be very low.
Hence getting insurance for $10m public liability on a rental property is cheaper than insuring one’s car since the pointyheads think the latter is a more likely claim.