My Dad Taught me about Cashflow with a Soda Machine
After a brief, failed experiment paying me to do chores, my dad tried something really neat. It clearly took a bit of legwork, but maybe there are some transferable lessons for parents who want to lay an entrepreneurial foundation.
He gave me a vending machine.
He rented the machine, found a location in a local workshop, and installed it. And then he told me two things:
1) That this would be the last time I was given allowance.
2) And that if I wanted to have any pocket money next week, I’d better spend this week’s on some inventory.
I ran the machine for about 4 years from the time I was 7 or 8. At first, my only agency was inventory management. We drove to Costco in his big van and I decided what to buy. Stocking an empty soda machine is easy: you buy four cases of each soda you want to carry.
But then the Coca-Cola runs out first and the Sunkist is half empty and nobody has bought even a single Grape Soda and should I cut my margins paying more per-unit for individual cans or do I buy full cases and find somewhere to store the extras and why am I doing algebra on the weekend!?
Looking back on it, I’m certain this whole endeavour operated at a loss. Dad subsidised it like crazy so I would have a safe–but real–environment to learn in.
At first, it was pure profit: he covered the expenses and I pocketed the take. As long as I did the work each week to buy inventory, count the revenue, and refill the change drawer, I was set.
That didn’t last.
Pricing, cashflow, operating costs, and capital expenditure
Once I was sitting pretty with my weekly soda profits, it was time for a change.
He let slip that, you know, maybe I could make more money if I raised the prices? After a week of brow-furrowing deliberation, I raised the price per can from 50 cents to 55. He told me that some of the customers were angry about the price increase.
I freaked out.
I tried to figure out whether I was earning more now or previously. Why hadn’t I been writing all this down? And even if I was making more, how safe was I? Would competition move in and undercut me by that crucial nickel? Would my customers walk across the street to make their soda purchase? Was I being greedy?
He began charging me for the gas we used to drive to Costco. Suddenly I couldn’t afford to make re-stocking trips every week — grape soda was cut for an extra column of Coca-Cola. I lost some niche customers. I invested increasing amounts into inventory to reduce gas costs. Our garage became my warehouse.
He wondered aloud if it might be worth buying one of those automated coin-counting machines to speed up my weekly bank trip. I saved up and invested.
And he gave me a taste of the joys and vanities of ownership. Watching someone drop a couple coins into my machine.
And then walking up to it, turning the key, unscrewing the lock, and opening the front. “That’s right. I’ll be getting my soda for free. I own the joint.”
Twenty year retrospective
The vending machine didn’t magically make me want to be an entrepreneur. I wanted to be a video game designer, then an engineer, then a video game designer again, and then an academic.
I get the impression kids are a bit slippery in that regard.
But when I stumbled into the startup world two decades later, the dots began to connect. Cashflow wasn’t a new concept. Inventory tradeoffs made a bit of sense.
This thing with the internet is like that thing with the sodas.