Independent retailers know their numbers. They are intimately involved with their stores, so they usually have sales and profit figures within a moment s recall. When it comes to the merchandise on their floor, they typically have a firm grasp of the quantity in their possession, how many items are contained in a single case, and similar figures. Unfortunately, beyond that, their grasp begins to waver. They may have a vague impression with regard to how quickly a particular assortment sells, but concrete numbers are fleeting.
This is one of the main reasons small retailers deal with persistent cash flow problems. They think of their inventories in terms of how much they have on stock rather than each item s respective turnover rate. The result is predictable: they invest in and carry too much unproductive merchandise. Excess stock is expensive because it ties up capital.
In this article, we ll take a closer look at inventory management and explore its primary goal. I ll describe why many independent merchants are focusing on the wrong objective and how that mistake impacts their bottom line. Lastly, I ll provide helpful tips for creating a sales plan that preserves your limited capital.
Understanding Optimal Inventory Management
Inventory management is the practice of limiting your merchandise to meet the projections of your sales plan. That definition deserves a few points of clarification. First, it takes into account the expected date of future deliveries. Second, it allows for an emergency stock to compensate for unexpected surges in sales. For example, suppose you re selling widgets and your sales plan predicts 200 units will be sold over the next two weeks. Optimal inventory management would limit your stock to 200 units plus a reasonable emergency reserve.
This requires a shift in how many small retailers think about their inventories. As noted, most merchants are accustomed to thinking about their merchandise in terms of how much is on hand, as opposed to sell through rates. That perspective does not allow them to manage their inventories effectively.
Cash Flow Versus Sales: Which Is More Important?
One of the reasons independent retailers neglect turnover rates is because they re trying to catch as many sales as possible. Unfortunately, that leads to a couple of serious problems. First, it s impossible to know how many sales are out there or when they ll materialize. That means the retailer is perpetually looking for the next sale.
Second, waiting for those sales to materialize requires keeping cash flow tied up in merchandise. Not only does that limit the merchant s flexibility in trying new assortments, but during slow periods when cash flow is critical, it can create a squeeze.
Creating A Sales Plan
The solution for managing your inventory and preserving your cash flow is to create a sales plan for each item you carry. Your plan should be based upon the number of units you have historically sold each week. Then, multiply that number by the number of weeks between deliveries. For example, suppose you sell 100 widgets each week and your vendor delivers shipments once each month. Your inventory should include 400 units plus an emergency reserve.
You ll notice that your sales plan is unique to your retail store. The number of units you sell each week of any given item will be dependent on your staff, customers, promotions, and other factors. The key is to find an optimal level of stock per item. That allows you to reduce the amount of cash flow you re forced to tie up in your inventory.
For small retailers, cash flow is critical for survival. Most merchants make the expensive mistake of allocating their limited funds toward stock levels that are far too high. Instead, shift your thinking and limit your inventory based on each item s turnover rate.
Author Resource:
G.A. Wright specializes in high-impact sales promotions that produce big increases in sales volume and attract big audiences. Check them out online at: http://www.gawrightsales.com
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