Money Matters

The importance of inventory planning

For businesses selling physical goods, inventory planning and stock control are often not given enough thought until it’s too late. 

When you’re a small business selling goods to the public or retailers, one of the most difficult things to get right can be your inventory planning. I don’t need to tell you that you are exposed on both sides of the ideal stock level. Too little stock, and you are losing valuable sales. Too much stock, and all your cash is tied up in stuff that you can’t sell. Both of these situations impact your cash position and, as such, are among the most critical issues to address. Cash is everything in a business, so you should do all you can to avoid wasting or losing it.

The “no-man’s land” of inventory planning

When it comes to stock control, I feel that there is a “no-man’s land” that needs to be crossed as a business grows, and finding where that lies for your particular business will dictate what you need to do in order to cross it.

When you are starting out, you may well feel that there are more important things to do than spend time and money on stock control. You’d probably be quite right about that – as a start-up the last thing you need are onerous administrative tasks. As the business grows, however, you enter the no-man’s land. The area where you may be thinking that you need to do something, but perhaps you’re still not sure exactly what to do, or even whether it’s financially viable.

Then, as you continue to grow, you will reach the point where you are big enough to need the processes and systems in place, but it is now difficult to deal with – you have less time, and the mistakes that you make are more expensive. The matter of inventory control is still not a priority, and you can’t afford the hassle of putting it in place. The truth is that you should have done it while you were in no-man’s land.

Basic forecasting is much better than none at all

There is no ‘one-size-fits-all’ solution to stock control, which is one good reason not to spend money on expensive management solutions on day one, but there are simple forecasting measures that you can take with even a basic spreadsheet.

You won’t get everything right – any form of forecasting is only guesswork – but you should make it as informed as possible. Think about average levels of sale, per week or month or whatever suits. Look at seasonal fluctuations to see how they impact on demand.

Check how much faster new items sell compared to your older products, and see if you can work out how fast the sales tail off. Be aware of how long it takes you to replenish stock levels. Make sure that you build in some form of buffer, or contingency, to allow for unexpected demand (but be careful to monitor this very closely – this is the area where you can easily tie up a load of cash!)

Aside from basic stock management, look at your business model. How far in advance are you able to get orders for your product? The more commitments you can get against goods prior to manufacture the better, obviously. Can you manage your customer’s expectations at the time of order in terms of delivery? What is your policy on returns?

Don’t feel bad if you end up getting some numbers wrong, as long as you’ve taken care to factor in everything you can. A rough forecast is infinitely preferable to none at all.

Be wary of the big boys

Don’t be too tempted to allow big retailers to rough you up too much! Obviously there is nothing better than getting your stuff into a big chain or a famous department store, but sit down and work it out before saying yes. Weigh up the reduced margin on their sales (they will likely want a huge discount!). Look at the stock they ‘reserve’ against the stock they actually buy.

Consider whether the items are exclusive to them – if they are, push for a no-return commitment. Check the costs of supplying them – do they need special packaging or delivery, and how much further is that going to erode your margin?

Then think about your other customers. If they see your goods in a big store, perhaps at a lower price than they can afford to charge (a reduction that you are paying for, remember!) will they think that they can no longer compete and stop carrying your range? This may seem a bit doom and gloom, but it can be the reality behind landing that juicy order.

Do sit down and spend time thinking all this through while you have a chance, and you will find that it isn’t too difficult to try and keep inventory and demand under control. You do need to do it and do it as soon as you are on a growth path – don’t leave it until you come out of no-man’s land, blinking into the light, and then find that it’s too late.