Everyone pretends to know more than they really do. I’m no different.

For years I’ve engaged in conversations about business and economics and figured I knew a bit about the subject. However, when I took a good hard look at myself I didn’t really know that much about economics. 

So I decided to change that and have been reading “Basic Economics: 4th Ed.”.

It’s been really helpful to put some structure around my existing knowledge, as well as challenge some of it.

Some of it seems obvious on the surface, however, when you look at things in a different light it shakes things up a bit.

One of these concepts that kept me up last night was the idea of how the speed of turnover impacts the overall return on investment of a business.

Here’s a quick example.

My old man owns a bike shop. He doesn’t have unlimited shelf space, nor cash-flow to invest in products. So part of his job is to pick profitable winners.

As he talks to a sale rep, he needs to make a decision on what to stock.

He could choose to buy a floor pump for $50 that he sells 1 of a week and makes $50 profit per unit. Giving him $2600 in annual profits.

Or he could choose to buy a tube for $5 that he sells 1 of a week and makes $5 profit per unit. Giving him $1825 in annual profits.

So a simple look at this would make you think that pumps are ultimately better to sell.

However, when you look at ROI on investment (which is ultimately what business is anyway) it’s very different.

(Obviously this very simple example ignores cost of sale etc.)

• The $50 investment for the first pump yielded $2550 in profit annually (5100% ROI)
• The $5 investment for the first tube yielded $1820 in profit annually (36,500% ROI)

So the tube had about 14 times better ROI.

Obviously there is more to it than this simple example, however, it shed fresh light on how business owners need to look at picking winners in terms of turnover speed to ultimately get the best ROI for their business.