My dad taught me cashflow with a soda machine

After a brief experiment in 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’d like to lay an entrepreneurial foundation.

He got 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 some of this week’s on inventory.

I ran the machine for about four years, from the time I was seven or eight. At first, my only responsibility was inventory management. We would drive to Costco in his big van, where I would decide what to buy. Stocking an empty soda machine is easy: you buy four cases of everything 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 or keep buying full slabs? And now my bedroom floor full of soda cases instead of toys and why am I doing algebra on the weekend!?

Looking back on it, I’m certain this whole endeavor operated at a loss. Dad subsidized 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 machine’s change drawer, I was set.

That didn’t last.

Pricing, cashflow, operating costs, and capital expenditure

Once I was sitting pretty on 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. When he got home from work, 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?

When I began to get bored of the basics, he added fresh complexities to keep it interesting and educational. First, 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, which meant that a single column of popular sodas (like Coke) would sell out before I could restock them. I made the hard call to cut the niche sodas (so long, Grape) and create more room in the machine for the popular ones. I lost some niche customers, but I never ran out of my top sellers. I started buying increasing amounts of inventory to reduce gas and travel costs. I negotiated with my parents to expand my “warehouse” from my bedroom to our garage.

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.

He would bring me to the warehouse and have me do “market research” where I would sit across the building, keeping track of how often people walked past and bought something. It was great fun and made me feel that my pocket money was really mine.

And it gave me a little taste of the joys and vanities of ownership. I remember, on one of the research trips, watching someone drop a couple coins into my machine. As they were walking away I strutted over to it, inserted the stumpy circular key, unscrewed the tedious lock, and opened the front: “Yeah, that’s right, I’ll be getting my soda for free – I own this 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.

Thanks, dad.