Falling Paper Prices: Is It Wise for Printers to Stock Up?
LarsonAllen Principal Brenda Bijnagte advises on demand, alternative needs for cash, and the cost of holding inventory in the Printing Industry Financial Executives March 2009 newsletter,
PIFELines. The following quarterly question and answer was reprinted with permission from
PIFE.
Question of the quarter with LarsonAllen’s Brenda Bijnagte
As paper prices continue to fall, should I stock up on inventory?
The economy these days isn’t doing anyone any favors. As printers, your customers are demanding more for less or just plain demanding less for less.
Buy low and sell high. Although instinct may tell you to buy when prices are low, buyer beware. It is long told in the stock market that if you time the market right, you can make a lot of money; however, if you miss, you can lose a lot of money. Few of us would invest a significant amount of our hard earned dollars into that volatility. The same thing is true for commodity pricing, such as paper.
When answering this question, consider the following:
Understand demand
It is recommended that you only buy what you have current demand for. If the price continues to fall, your company may have a hard time using the excess paper on jobs because you cannot bid it competitively. In addition, if prices continue to drop, you may need to write your existing inventory down to the lower of cost or market at the end of a reporting period for inventory still held in stock.
Alternative needs for cash
We’ve all heard the adage, “cash is king,” and in many cases it’s true. Because it is difficult to predict future demand at a consistent pace, your printing company’s ability to be flexible and have available cash is important.
Cost of holding inventory
Consider the following when determining the cost of holding inventory:
- If you are borrowing on your line to make the purchase
- Whether you have to pay storage or warehousing costs
- If decline in paper price is significant enough to cover the additional cost of money being invested
In addition, preserving a strong cash flow and maintaining an adequate, but not excessive, level of inventory will allow your company to build those cash reserves and invest in infrastructure or labor when demand returns.
For more information, contact Brenda Bijnagte at bbijnagte@larsonallen.com or 612-376-4677.