Sin number 10 - Not managing your stock.
By Greg Carroll
This mainly applies to businesses that need to purchase stock or raw materials that are processed or marked up and on-sold; in other words, manufacturers, retailers or distributors. The earlier section covering the operating cash cycle hopefully illustrated that there is a cash requirement to hold stock. The longer stock is held before it is converted into a sale the higher the cash requirement will be.
The length of time stock is held is known as stock turn and is usually represented in number of days. Your objective is to make this number as low as possible to reduce your holding costs. This is of course easier said than done, but there are a number of things you can do to assist in this regard.
Know your customer
This is probably the most important factor. There is little point filling a store with product that a client doesn't want or need. Whatever your resources will allow you should be researching your market to find out what their motivators are and how your product will fill the gap that is missing for them.
If you are looking at a new product launch, a good first step is to do some testing or sampling with a small section of your market or with some existing customers. Even just meeting with a couple of customers or some people in your target audience will give you a very quick gauge of the product's likely take up. It would certainly be better to find out if you're on a loser before you spend thousands on a product that no one wants to buy.
Have a stock management system
The sophistication of your system will be dependent on the size of your business, but you need to have something in place so at any point in time you have an immediate grasp of what stock you have, which stock is moving fast and which stock is not. You also need to know when stock has to be ordered to make it arrive by a certain date. What you are aiming for is a just-in-time system, so that stock sells almost as soon as it arrives.
If possible try to get the orders before you get the stock. This is exactly what property developers do. Unless they know they can sell a certain percentage of units in a development they won't start construction. It may not be possible in all cases but if you can get by with a few samples to market your product rather than purchasing a container load then this will significantly reduce your holding costs. You may also manage to get paid before you have to pay for the stock.
Having an on-line retail shop can be a way of dealing with this as you don't need to hold any physical stock at all. Again the on-line space can be a good way to test the take up of product at low cost.
Have a promotional plan in place
If you do have to purchase stock then make sure you have promotional activity ready to roll as soon as the stock arrives. You don't want to find yourself in a situation where you have stock to sell but can't get media space to promote it.
Get rid of tired stock
If some of your stock has been sitting around for a while then chances are you are not going to sell it at full price. You could consider having a discount sale so you at least get some money back or better still use it as a bonus item to encourage sales of higher margin items. For example if you were a bike store and had some older cycling jerseys that weren't moving, rather than discounting the jerseys you could package up the jersey with a new bike and some other accessories so you sell a higher priced item.
Are you on top of your cash flow?
Are you currently in business or planning to start a business in the near future? Do you have cash flow concerns or want to find ways to improve your cashflow? Are there things you should or could be doing to improve your cash flow now?
To find out simply complete our Cashflow Review Form or complete the form below for an initial interview.