Last week, I started my Inventory Management series by discussing some basic concepts and common mistakes. Today we’re going to get down into the weeds—we’ll start with tracking and then briefly touch on some metrics you can use to evaluate your performance. I’ll talk more about metrics in my next article, but accurately tracking your inventory is a prerequisite to that.

I’ll describe the way I do this, but you should understand that it is not the only way. There is plenty of room for variation in the way you track and the metrics you use, so put your own spin on it. As long as you are drawing the right conclusions, it works.

This certainly won’t be the most exciting Magic finance article you ever read, but hopefully it will help you improve your margins. Here we go.

Your Assets

The first thing to understand is that your Magic cards are assets. In the accounting sense, assets are tangible things that you own that have value. Cash is also an asset, just like sealed product and singles. Mostly, managing your inventory means managing your cash and cards.

Because they hold value, assets are different from expenses. Expenses are things you spend money on and then are used up or don’t hold value. Things like rent and shipping fees are definitely expenses, and you should also consider sleeves, boxes, etc. to be expenses. Obviously you want to track your expenses too, but we aren’t going to cover it here because this is about inventory. Also, your amazing Limited skills are not an asset in the accounting sense of the word. Sorry!

The first thing you want to do is make a balance sheet, which is super simple. It’s a high-level list of all your assets.

If you are just starting out, your balance sheet might just be this:

$1,000 Cash

More likely, you have mix of cash and cards, maybe like this:

$500 Cash

$500 Singles

$1,000 Total Assets

It is very important to track the cash you have for financing. You really don’t want your Magic cash and your personal bank account to be one big pot. It’s hard to evaluate yourself that way and it can lead to some feel-bad moments like trying to pay your rent in [card]Birthing Pod[/card]s if you mess it up.

So you have some cash and some cards. When you buy or sell cards, you are just converting cash to cards on your balance sheet or vice versa. Let’s say I’m starting with the $500/$500 split above and decide to pick up a Return to Ravnica booster box for $100.

– $100 cash

+ $100 sealed product

Now my balance sheet looks like this:

$400 Cash

$500 Singles

$100 Sealed Product

$1,000 Total Assets

My total hasn’t changed, I just changed the mix.

You don’t want to mix your business cash with personal cash, but you will have cash flowing in and out of your Magic business by necessity. If you need $100 to buy the girlfriend a birthday gift, just record it. Now you are minus $100 cash and have $900 in assets for your Magic financing endeavor instead of $1,000. Similarly, if you want to ramp up your speculation efforts and put another $500 from savings into cards, record the inflow of cash as a transaction. Transparency is key! You need to know where every dollar comes from and where it goes.

Tracking Inventory

You buy some cards. Inventory goes up, cash goes down. When you do this, you need to record some information about what you bought. At a minimum, here is what you need:

What you bought: the card, sealed product, etc. You might want to record set, condition, or other relevant bits of information. Quantity, in whatever units are applicable (cards, boxes, packs, etc.). The price you paid for each unit. Make sure the units match. From this you can calculate the extended price, which is just the quantity times the unit price. The date of purchase.

It might look like this:

When you total up everything you have here, it should match your balance sheet. In this example, I’m showing $207.03 of singles, which would show up on my balance sheet next to any cash I have left.

Cost Averaging: If you are buying the same card at different prices (which will definitely happen), I recommend using an average cost. So for example, if I buy four [card]Scavenging Ooze[/card]s at $6 and four at $7, I’m recording those as eight $6.50 cards. There are other ways to do this too, but they’re much more hassle than they’re worth, in my opinion. Doing the math creates a little extra work on the front end, but simplifies the process greatly when you sell. I use the average cost method even if I’m buying many copies over a long period of time. Just keep recalculating the average whenever you add to your position.

All-In Cost: You should also roll any shipping into the card cost. If I buy a playset of Oozes for $7 each and pay $1 in shipping, I’m dividing that dollar over the four cards and putting them into inventory at $7.25 each. If there are any other random costs associated with acquiring your inventory, roll them into the cost as well. An example that comes to mind is spending $20 in gas to go pick up a case of booster boxes you bought on Craigslist. Consider it part of the purchase price.

Mark-to-market: You are going to carry your inventory at the price you paid for it. This means that when cards increase dramatically in value, you will have unrealized gains. For example, [card]Misty Rainforest[/card]s you bought at $30 each will continue to be tracked at $30 in your inventory no matter how much they are actually going for. You may feel temptation to mark these up to the market price (called mark-to-market), which will increase the value of your assets on your balance sheet by realizing the gains on paper.

I recommend you resist this urge. First, it’s a real pain to constantly be adjusting the cost of the cards in your inventory. Second, you are going to be inclined to mark things up when it is in your favor and inclined to avoid it when it’s not. Third, carrying cards at their original cost forces you to sell to realize the gains, and I tend to think that is a good thing. As always, use your best judgement.

One last thing—your assets may fluctuate over time. For the metrics we are going to use later, it is necessary to record your inventory and cash totals periodically. I do this at the beginning of every month. Start another sheet and punch in the total amount you have in cards and in cash at the start of each month, just those two numbers. This will allow us to figure out the average inventory and average total assets.

Sales

At this point you should have two main things. The first is a balance sheet that shows, at a high-level, how much money you have in cash and cards. You should also have a detailed list of all the cards or product you own, which is your inventory list. Good start.

Now you sell some of your cards, which is the goal. Even better, you sold them for more than you paid.

I’m going to use the [card]Scavenging Ooze[/card]s listed above. I’m carrying eight copies in my inventory at $6.95 each. Let’s say they shoot up and I sell them for $9 each after fees (that’s important, you can’t forget to take fees out).

Here’s what happens to my balance sheet:

– $55.60 Inventory (8 * $6.95)

+ $72.00 Cash (8 * $9.00)

I take the Oozes out of inventory and put the cash I made in. So now my balance sheet went from this when I started:

$207.03 Singles

$207.03 Total Assets

To this:

$151.43 Singles

$72 Cash

$223.43 Total Assets

My total assets have increased by $16.40, which is the profit I made on the sale. You want to track your total sales and profit separately. It all goes in the “cash” bucket on your balance sheet, but later on you will need to tell the difference between cash that you contributed and cash you made.

You will notice that even though I only made $16.40 in profit, I now have $72 in cash because I get my original investment back. We’ll talk more about this next time, but raising cash is usually a good thing. Not only do I lock in that $16.40 in profit, but I open up the full $72 (original Ooze investment plus profit) for other buys.

Return On Assets

If you are still with me, you are now effectively tracking your inventory. It really wasn’t that hard. We have all the information we need now to measure our effectiveness, so let’s talk about that.

The first thing you want to know is your return on assets (ROA). This tells you whether your entire Magic financing adventure is even worth it. Here is our version of ROA:

ROA = Profit / Average Total Assets

You can do this over any time period, but a year is a good place to start.

An example to illustrate the importance of ROA. Trader A and Trader B both made $5,000 in profit from selling cards last year (not sales, profit). Trader A keeps about $5,000 in inventory and cash on average for his business, while Trader B keeps a whopping $50,000.

Trader A’s ROA for the year is $5,000 / $5,000 or 100%. Trader B’s ROA is $5,000 / $50,000 or 10%.

This means, for starters, that Trader A is crushing Trader B even though they are making the same amount of money. Trader A made the same profit with far less cash and inventory. If he scaled inventory up to what Trader B had and maintained his ROA, he would have made $50,000 profit to Trader B’s $5,000.

The ROA number is also a good one to compare to other investments. Trader B is making $5,000 in profit (income) on the $50,000 he has invested in cards and cash for a 10% return. That is better than he is going to get in a savings account, for sure. It was worse than having that money in the stock market in 2013 but probably slightly better than the average year. Trader A is crushing everything in sight, it would be a huge mistake for him to invest money anywhere else with a 100% ROA.

When you are doing these comparisons, keep in mind how much effort you are putting into your financing activities. If you can just plop your money into an index fund and earn the same return as you would buying and selling cards all year, it’s not worth it. You should be looking for an ROA substantially higher than your other options.

Your ROA is going to stink when you first start. That’s because you have to ramp up inventory first by necessity, with sales to follow. This metric is best used after you get rolling.

A bad ROA indicates you are doing something wrong. It doesn’t really tell you what you are doing wrong—you will have to diagnose that yourself. Next we are going to talk about inventory turnover, one of the things that will help you increase your ROA.

We’ll pick up there next week.

Thanks for reading.