My business coaching story part 2 or 3
It is often the lack of a proper understanding of the relationship between the two that is the greatest impediment to run a successful business. I cannot emphasise enough the importance of managing and controlling stock, and I will give you some ideas as to what one needs to do to ensure that one puts in place the right mechanism to achieve these objectives. How to keep a balance between sales and stock to achieve and maintain a positive cash flow Having said this, I must make the point that however important this is to a business, it must not be seen in isolation. It is but a part of a total plan, a business plan. No business, big or small, should be managed without it. It need not be an elaborate document; it can be kept short and simple, but must contain all the necessary elements to make it meaningful. All it needs to do is spell out: • the reasons you have gone into business • what you want to achieve in your business • how you intend to go about doing it • the costs involved • the funding required • a budget • and a list of the performance indicators necessary to measure the results It is a road map and one needs to follow it. It tells you whether you are on the right track and if not, why not. You need to regularly review and fine-tune it from time to time in order to achieve the desired results. It highlights any weaknesses and gives a warning of any issues that might arise and need to be taken care of before they become a problem. The whole basis of stock management and stock control is directly linked to the requirements of the business plan to ensure a positive cash flow. Stock management is the process that one must follow in order to ensure that the business is keeping the right kind of stock at the appropriate levels, at all times, to achieve the levels of sales and GP budgeted. Tracking the stock from the moment it is delivered to the store and following its movement in the store till someone takes it, pays for it, and takes it out of the shop, is stock control. It is the way one follows the system, monitors the results, and acts on it in accordance with the requirements of the business that will determine whether one will be making any money or running out of it. It is surprising to find out how many people think they are running a successful and profitable business, only to be shocked to discover that they are tight on cash, all because they did not keep an eye to what is actually happening to their stock. Tracking the movement of stock is essential to knowing what is happening in your business. If you have too much stock, it can cost you a great deal of money just keeping it on the shelves. It is said that to keep the stock on the shelves in the store costs about 20% of the cost value of the stock-on-hand. Just think of it. If your average stock-on-hand level is about $200,000 p.a. the holding costs can amount to $40,000 per annum. If your annual GP is around 50% (i.e. at an average markup of 100%) and your annual sales are about $1,000,000 your GP would be reduced by about 8%. Of course, the cost of holding stock is part of running a business, but the lower the level of stock sitting in the storeroom, the lower the costs of holding it. In other words, the higher the number of times your can turn over your stock per annum, the lower the stock you need to keep, and the lower the costs of holding it. The costs of holding stock include, but are not limited to the following: • Interest charges for the funds employed • Insurance • Spoilage, damage and obsolescence The secret of good stock management is knowing what stock to buy, when to buy it, how often, and at what quantities to meet customers’ demand. There is a fine line between low stock holding through good management and low stock holding through bad management. This in effect means keeping stocks low because of a tight financial situation or simply, too strong a focus to keep costs down in the mistaken belief that this is the way to make a profit. This could mean not having the right level of stock at the right time to meet customers’ demands. Consequently, quite often missing out on sales, and thus, not being able to achieve budgets and possibly alienating one’s customers in the process. Every retail business has two levels of stock requirements. One is to keep a reasonable level of core stock on the shelves; the other is to buy bulk, for a specific campaign or special event, in the hope of achieving much larger sales. This can also apply to special purchases of core items meant to be promoted for a specific period of time. Our knowledge, experience and ability to accurately monitor our sales will determine the level of core product purchases. We know how much product we are likely to sell over a given period, and it depends on the frequency we need to order, and the added costs such as freight, that governs the quantities we need to purchase at any one time. And if we manage this process correctly, we will have sold such products and got the money for it before we have to pay for it. It is important to understand that to buy any of the core products in larger quantities than is necessary to meet demand (except when planning a special promotion), can be unwise unless the additional savings are quite considerable and justify the extra money tied up by such a purchase. When an opportunity arises to bulk buy the following must be carefully considered: • The possible quantities one is required to purchase even if its filler • The popularity of the items offered • The quality of the goods • The full amount of the investment and terms of payment • The expected period it will take to dispose of the goods • The net GP that will be generated If the goods purchased cannot be sold before payment is due, great care must be taken to ensure the goods don’t remain in stock any longer than absolutely necessary, and are promptly disposed of to retrieve the balance of the investment with the minimum of delay. Holding onto such goods could create the opposite of what was intended and could ultimately cause serious cash flow problems. A bargain is not a bargain unless it can deliver the hoped for GP within strict time limits. It is surprising how often a business lets faulty goods accumulate before returning them for exchange or credit. “Our Biz tripled its GP in 2 months: LFS“The cost to the business can be quite amazing. If not managed properly, it can have an adverse effect on the business’s GP and cash flow. Here is a good business model: here. When goods arrive in your store you must insist that they have the invoice, or some other document attached, showing the number of units delivered and the prices charged. You cannot accept anything less, because without it, you don’t have the means to check the delivery and the accuracy of the charges. If you have the invoice check it first against your order and then check that the items and quantities supplied correspond with the order. Price the goods and put them on the shelves, always ensuring that the shelves are fully stocked up before you put the balance in the storeroom.