I have been reading with interest the news of electronic retailer Dick Smith’s current 70% off sale. The assumption from such an extraordinary move in the weeks leading up to Christmas and beyond would have to be that they have significant issues with stock management, a cash crisis or both.
I regularly advise my clients about the importance of managing stock efficiently and recently made a quick video tip to that effect.
What many small business owners sometimes fail to appreciate is the vital role that effective inventory management plays in running a successful, profitable business.
Stock affects both your profitability and your cash flow. There is a fine line between holding too much stock which may mean that you have profits tied up in your business while not enough stock may mean that you are missing out on sales.
The wrong stock mix could affect your gross profit margins. What’s more, if you do have to start mass discounting your stock to stimulate sales, as in Dick Smith’s case, your suppliers may well become anxious and look to withhold supply.
So what can you do to manage stock more effectively?
Ideally, retailers should be using real time inventory management systems and collecting, monitoring and analysing data on what is selling and what’s not.
Make sure that you monitor stock regularly. I would suggest that this be at least on a monthly basis. Compare your stock items to the monthly sales of those items. That way you can adopt an appropriate sales strategy, see which items are selling well and avoid supply shortages as well as avoiding purchase of excess inventory for those lines not moving so quickly.
Having a good handle on how stock impacts your business is imperative. Understanding the peaks and troughs of your sales can be invaluable for a small business as it allows you to create a cash flow forecast to understand the months when cash flows could become tight and enable you to put strategies in place to manage this.
One final point that I think it’s important to make in relation to inventory management is the need to manage your growth.
It has been reported that Dick Smith opened 70 new stores in a 3 year period. While we all aspire to develop and grow our businesses, if you’re growing too fast you can experience significant cash flow issues. Achieving a sustainable growth rate is vital in ensuring you are able to grow your business profitably without taking on a disproportionate amount of debt.
If you need any support in managing your stock effectively or creating a cash flow forecast, don’t hesitate to give me a call on 07 3391 1188.