One of the common challenges sellers face is that capital is always limited.
Even if the business is growing, there is rarely enough money to stock everything that looks profitable.
Because of this, investment decisions in working capital are not isolated. Choosing one product almost always means not choosing another.
Yet many sellers continue to evaluate products independently looking at margin, markup, sales velocity, or lead time without considering how these products compete for the same capital.
In practice, the question is much simpler and much more direct:
Where should the next unit of capital go to create the highest return?
Products must be compared against each other, not in isolation
A product may look good on its own. It may show strong margin, and stable sales. But if another product generates a higher return over the same period or releases capital faster, the first product becomes less attractive simply because capital has better alternatives.
When capital is limited, "good" is not enough. The product must be better than the available alternatives.
This is the same logic that applies to any investment decision outside e-commerce.
Working capital is just another form of investment, and investments always compete with each other.
Why this becomes important only when capital is constrained
When a seller has excess capital, it is possible to stock almost everything with acceptable performance.
But when capital becomes scarce, which is usually the case in growing businesses, prioritisation becomes essential.
At this point, factors such as:
- •how long capital remains tied in the product,
- •how quickly it returns,
- •how much it earns over that period,
- •and how it compares to the cost of capital,
start to determine which products deserve investment.
A product that performs "well enough" on its own may not be the best option when viewed relative to others.
Opportunity cost becomes the key
Once capital is limited, every choice has an opportunity cost.
Investing in one product means forgoing profits from another.
Even if the first product is profitable, it may still be a suboptimal decision if the second product generates more value per unit of capital.
This logic often changes how sellers look at their assortment:
- •Some slow products with good margin become less attractive,
- •Some fast products with moderate margin become more valuable,
- •Some categories become impossible to scale efficiently because the capital requirement grows too fast.
The evaluation is no longer: "Do I like this product?", but rather: "Is this the best available use of my capital right now?"
Cost of capital sets the minimum threshold
Once you incorporate the cost of capital, the idea becomes clearer.
If your cost of capital is expressed as an annual rate, then each product must generate an annualized return above that threshold to create value.
If two products are both above the threshold, the one with the higher return adjusted for time becomes the better choice.
If a product earns less than your cost of capital, it effectively destroys value, even if it sells well.
Capital that could work harder elsewhere is tied up in a slow, low-efficiency cycle.
This is why comparing products is essential
In an unconstrained world you could invest in anything that looks profitable.
But in the real world, where capital is always limited, the key question is comparative:
- •Which product returns capital faster?
- •Which product yields a higher annualized return?
- •Which product is closer to or further above your cost of capital?
- •Which product scales more efficiently without exhausting liquidity?
Only by comparing products relative to each other can you find the best allocation of capital.
The main idea
When capital is limited, which it almost always is, inventory decisions are not about "good or bad products".
They are about prioritisation.
A product that seems fine on its own may be a poor choice when compared to alternatives.
Effective decisions come from understanding:
- •the return generated by each product,
- •the time required to generate that return,
- •and how both compare to the cost of capital.
This framework leads to better use of limited resources and improves the long-term financial strength of the business.
In the previous article, Cost of Capital — A Critical Factor in Working Capital Investment Decisions, we examined why cost of capital defines whether an inventory investment creates value.
In the next article, Why Payment Terms Matter Much More Than They Seem, we'll look at how payment terms affect when cash actually leaves the business.