The import order we paid for four months before we sold any of it

The quote from the overseas factory was the best number I had seen in two years of running a small retail and online business. The product we had been buying through a UK distributor at £13.10 a unit could be had direct at $9.40, on a minimum order of four thousand.

I did the sum on the back of a delivery note in about ninety seconds and the answer was obviously yes. It was obviously yes for a year. What I had calculated was the margin, and the margin was entirely real. What I had not calculated was when.

The number that looked irresistible

Four thousand units at $9.40 came to $37,600. At the rate we booked, that was about £29,600 — roughly £7.40 a unit against the £13.10 we had been paying. On a retail price of £21.99 including VAT, which is £18.32 excluding, we were going from £5.22 of gross margin per unit to something closer to £10. Across four thousand units that is around £39,000 of gross profit instead of £21,000.

That is not a marginal improvement. That is a different business. The mistake was not in wanting it. The mistake was treating a good margin as though it were a good cash decision, which are two entirely separate questions.

The timeline nobody drew

Here is what actually happened, and it is the part I would put on the wall now.

The 30% deposit, £8,880, left our account on 9 March. Production took six weeks. The balance of £20,720 was payable against shipping documents, so it went on 5 May, before the goods had left the port. The vessel sailed, spent five weeks at sea, then sat for a further eleven days between arrival, customs clearance and a delivery slot. Stock reached our unit on 22 June and went out on shelves and online at the end of that week.

The first unit sold on 2 July. Sixteen weeks after the deposit, and eight weeks after the point where we had paid for the whole thing.

Then the second half of the problem. Four thousand units is a lot of stock for a business our size. Sell-through took nineteen weeks, so the final cash did not come back until the end of November. From the deposit leaving to the money returning was very nearly nine months, for an order I had mentally filed as a purchase.

The margin tells you whether an order is worth doing. The timeline tells you whether you can survive doing it. I had only ever done the first calculation.

What was not in the unit price

The other thing the ninety-second sum missed was that $9.40 is the price of the goods, not the price of having them.

Freight and marine insurance came to £2,400. Customs duty applied at the rate for our commodity code, charged on the customs value of the goods plus the freight cost to the border, which added a little over £2,000. There was a customs broker's fee, port charges, and an inland haulage cost to get a pallet from the port to us. By the time it was all in, our landed cost was around £8.50 a unit rather than £7.40.

Still an excellent price. But £8.50 against £7.40 is a 15% miss on the number the whole decision was based on, and it is entirely predictable — it just requires asking the freight forwarder for a landed cost quote rather than working from the factory's invoice. We now never sign off an import order on a unit price. We sign it off on a landed cost per unit, with the duty rate for the commodity code confirmed in advance.

The VAT mistake, which was the avoidable one

The genuinely unnecessary damage was self-inflicted. Import VAT at 20% on the customs value came to roughly £6,600, and we paid it at the border.

We did not have to. Since the end of the transition period, any UK VAT-registered business can use postponed VAT accounting on imports over £135, without applying for it or getting permission. Instead of paying import VAT at the border and reclaiming it on a later return, you declare it and recover it on the same VAT return, so the cash never leaves the business at all. You need access to the Customs Declaration Service and you use the monthly postponed import VAT statement to complete the return, accounting for the VAT in the period covering the date of import shown on the customs declaration — not the date the statement appears, and not the date the goods reach your warehouse.

That one setting, which our broker would have applied had we asked, would have kept £6,600 in the account through the worst six weeks we had. It is worth being clear about the limit, though: postponed VAT accounting covers the VAT only. Customs duty is still payable at the border. For that there is a separate mechanism — a duty deferment account, which lets approved businesses pay a month's duty by direct debit rather than consignment by consignment, and which requires an application to HMRC.

The crunch, in figures

Add up the cash out before a single unit sold: £29,600 of goods, £2,400 of freight and insurance, a little over £2,000 of duty, plus broker and haulage. Call it £34,500. And on top of that, for eight weeks, the £6,600 of import VAT we need not have paid.

Our overdraft facility at the time was £22,000. September's VAT return brought the £6,600 back, and the stock sold well enough that by December the numbers looked excellent. In between, we paid our own suppliers late twice, deferred a piece of equipment we actually needed, and I spent about six weeks checking the bank balance every morning before I did anything else. The business was never insolvent. It was simply out of room, which is a distinct and horrible feeling that has nothing whatever to do with whether you are profitable — the distinction set out in cash flow vs profit.

The three things that would have fixed it

First, a smaller first order. Four thousand units was the factory's stated minimum, and I treated it as fixed. It was not. On the second order we negotiated a first run of 1,500 with the balance called off in two later shipments at the same unit price, in exchange for committing to the full annual volume. The factory cared about the annual number, not the shipment size. It cost us nothing and cut the peak cash requirement by more than half.

Second, import finance. Trade or import finance is designed for exactly this gap: the lender pays your supplier, and you repay when the goods have sold, typically over 90 to 150 days. It costs money, and it is far cheaper than the alternative of tying up every pound you have. If we had funded the balance payment that way we would have paid a few hundred pounds and avoided the entire episode. Which product fits which gap, and how to size it, is the subject of how much funding do you actually need — and the answer for imported stock is almost never your own current account.

Third, the currency. We paid in dollars and took whatever rate we got on the day, twice, eight weeks apart. On a $37,600 order a two-cent move is around £460, which is real money on a small order and serious money on a large one. A forward contract fixes the rate for a future date, so the price you calculated is the price you pay. Most business currency providers offer them, and for anyone importing regularly it converts an uncontrolled variable into a known cost.

What we do now

Every import order gets a one-page sheet before it is placed. Landed cost per unit including duty, freight and broker fees. The date each payment leaves. The expected date stock is sellable. An honest estimate of weeks to sell through, based on what the last comparable line actually did rather than what we hope. The peak cash the order requires, and where that cash is coming from.

If the peak exceeds our headroom, we do not cancel the order — we change its shape. Smaller shipment, staged call-offs, import finance, or a later start. The margin is still worth having. It is just no longer allowed to be the only number in the decision. The wider habit of watching what stock is costing you while it sits there is covered in stock control basics, and it is the same lesson at a different scale: a shelf full of correctly-priced stock is still a shelf full of your money.

Common questions

What is postponed VAT accounting, and should I be using it?

It lets a UK VAT-registered business declare and recover import VAT on the same VAT return, rather than paying it at the border and reclaiming it later. It applies to imports over £135 from anywhere in the world, and for most importers there is no reason not to use it, because it removes the cash outlay entirely. You do not apply or seek permission; you need access to the Customs Declaration Service, you tell your customs agent or broker to use it on the declaration, and you complete the return using the monthly postponed import VAT statement available online. Account for it in the period covering the import date on the declaration.

Does postponed VAT accounting cover customs duty as well?

No, and assuming it does is a common and expensive mistake. Postponed VAT accounting deals only with import VAT. Customs duty, where your commodity code attracts it, is still payable at the border before the goods are released. The equivalent mechanism for duty is a duty deferment account, which allows approved businesses to pay a month's accumulated duty by direct debit rather than consignment by consignment. That does require an application to HMRC. Duty is also a real cost rather than a timing issue, because unlike VAT you cannot reclaim it, so confirm the rate for your commodity code before you commit to an order.

How does import or trade finance actually work?

The lender pays your overseas supplier on your behalf, either against the shipping documents or under a letter of credit, and you repay once the goods have arrived and sold. Terms are typically 90 to 150 days, which is set to cover the shipping and sell-through period rather than a full year. Pricing is usually a fee per drawing or a margin over a reference rate, and lenders will look at your trading history, the supplier relationship and the saleability of the goods. It is one of the more expensive forms of borrowing per pound, and considerably cheaper than tying up every pound of your own working capital in a container.

How large should a first order from a new overseas supplier be?

As small as the supplier will accept, even if the unit price is a little worse. A first order is testing three separate things at once: whether the product is right, whether the factory delivers what it promised, and whether your own market sells it at the rate you expect. A stated minimum order quantity is frequently negotiable if you commit to an annual volume with staged call-offs, because the factory usually cares about the total rather than the individual shipment. Paying slightly more per unit on a first run is cheap insurance against having four thousand units of the wrong thing.