Don't Have Your Profit Tied Up in Inventory
Would You Put Dollar Bills on Your Shelves vs in the Bank?
In today’s episode: We discuss how local small business owners are hurting their bottom line by having too much cash tied up in their inventory. We will walk through weeks of supply and how much your inventory turnover should be.
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Episode 66: Don't Have Your Profit Tied Up in Inventory
Welcome back to the Local Small Business Coach Podcast. I am your coach, Tammy Adams.
Today we are going to take a look at how much inventory you should have on hand at any time.
Hey everyone, how’s it going? Thank you for tuning into another episode the Local Small Business Coach. If this is your first time listening to the show, then welcome to our little show. Glad to have you aboard and hope you will stick around for a few episodes and hopefully become a regular. My number one goal is to help you with your businesses sales, profits, processes and people.
If you listened to the last episode, we discussed how your payroll is your largest controllable expense. Today, I’d like to talk about your second largest controllable expense and that is your inventory.
Now inventory can refer to products you sell, products you use to assemble other products, and possibly even tools or equipment you use in the course of your business.
If I can get any concept across to you it is this… Inventory = Money
Not only because it takes money to purchase inventory, but more importantly because the money used is money that could be sitting in the bank vs on the shelf.
The trick to inventory is having enough to do your sales and to grow your sales yet not too much that you are hurting your profits. Inventory that is sitting, isn’t making you money.
A huge mistake business owners make (both large and small businesses by the way) is that they sit on too much inventory.
In big companies, they track what is communally called WOS, weeks of supply. Ideally you want around 4-6 weeks of supply, however some items might be a couple of days worth and others might be longer.
HOW DO YOU DETERMINE HOW MANY WEEKS OF SUPPLY YOU NEED?
So how you actually determine the number of weeks of supply you need? It depends on a couple of factors. The first being, how many you sell daily or weekly. The second being how long it takes to replenish you stock.
For example, if you have big bulk items, you might not be able to store more than a couple of days worth. A great example from my past life was drywall. Most stores would carry a couple of days worth with it being replenished every couple of days. Otherwise the entire building would be full of drywall alone if we tried to carry a couple of weeks worth. Do you have something in your business that might be big and bulky and would take up way to much space to hold enough?
Another item that might need a few days worth of inventory would be highly perishable items. For example fruits and veggies in a store might fit this area. If you have a quick service restaurant you probably have items that you need to get weekly or a couple of times a week to keep them fresh.
While the big bulky stuff comes down to not having enough space, these perishable items, if too much is on hand, costs you money due to spoilage and having to toss it.
You can always sell down the bulky stuff, but you have a complete loss of perishables.
The key on both of these examples is having just enough to match your lead times for replenishing and knowing what you need to maximize your sales and keeping your losses to a minimum.
TURNOVER = WEEKS OF SUPPLY
You might hear two terms associated with your inventory: Turnover and Weeks of Supply. Turnover just refers to how often you turn over your products or inventory. Now the average turnover as I mentioned usually falls between 4-8 weeks depending on sales and ordering.
Basically, you will go through your entire inventory in the 4 – 8 week window. Let’s assume it is 6 weeks. This means that you will go through (turnover) your inventory 8.67 times a year.
This is a key number that big box retailers as well as other Fortune 500 companies keep a close eye on. Wall Street tracks these numbers and uses it as part of what they feel the value of a stock is.
If these folks think it is so important to watch, don’t you think you should as well?
CHALLENGES TO WATCHING YOUR INVENTORY
So what are the challenges to you watching your inventory?
Probably the #1 challenge you have is the pack size. When I had my ice cream shop for example, I had to order cups by the case. The case might have 1000 cups in it for a size I was lucky to sell 15 a week of. That equated to 66 weeks of supply. Yep, over a year’s worth cups!
So what can you do? Think outside of the box. If you are a franchise, can you split with another store? If you aren’t a franchise, can you buy off another similar business? Can you buy from other resources that split packs? Can you purchase and then sell off the extras?
Another challenge you might run into is being remote and not being able to get inventory as easily as in other places. In this case, you might have to set time aside to travel for your supplies to keep them at a more reasonable cost.
Is there ever a time you should have lots of inventory on hand? Yes, but it is rare. Just know that you will have an initial investment set aside for your inventory and as you sell through it, just keep the funds set aside to replenish. The goal then becomes about staying within that budget and not investing more than needed to maximize your sales.
TIMING SEASONAL SWINGS
By the way, there will be times of the year when you need to bulk up your inventory to go into spikes due to seasonal swings. The key is to time your seasonal swings.
Buy too early and you have money sitting on the shelf, buy too late and you risk missing the up swing in business.
But you also can hurt yourself on the down swing. Think about those 50% off sales the day after Christmas, Valentines and Easter. These businesses would rather sell at a loss then hold onto that inventory until the next season.
As frustrating as it might be not to be able to buy Christmas lights a few days before Christmas, it is the best thing that could happen for those businesses. No selling product under cost and no inventory to figure out what to do with it.
INVENTORY = MONEY
Remember, inventory is money. Depending on your business, that inventory can be anywhere from a $500 to thousands of dollars. Big box retailers can have millions in their overheads not just on their shelves. Once again, money that isn’t in the bank.
Inventory that isn’t making you money is costing you money. So my challenge to you is, do you even know how much money you have tied up in your inventory?
When was the last time you took inventory of your inventory?
You should do this either monthly or quarterly depending on your business. You really should do it before writing orders for more product.
When I had my store, I could tell you how many weeks of supply I had not only in ice cream, but in supplies. My days at Home Depot taught me this lesson. Every order we did had our weeks of supply on it. So when I took over my ice cream place, I created a spreadsheet that also gave me my weeks of supply.
If I knew I sold 6 tubs of mint ice cream each week, and I got ice cream each week, then I was going to have around 2 weeks of supply to be safe from hiccups. So yes, I had 12 tubs of mint ice cream. Fun side fact, mint chocolate chip is one of the top ice creams right behind vanilla and chocolate.
Could you tell me your inventory amount and your weeks of supply? Have you ever dialed it down to knowing at this detail? If you do, awesome! I’m proud of you. If you have no clue, then today I want to challenge you to start watching this HUGE expense at a much closer level.
Do not let your money be tied up in products, tools or equipment that is just sitting on the shelf or in the yard. Keep it in the bank where it belongs!
And with that,
I want you to know, that I realize being a local small business owner can be a lonely gig at times. But you don’t have to do it alone. Just know, I’m always here for you.
By the way, If you like what we are taking about, then make sure to subscribe to the podcast so you don’t miss an episode, if you love the podcast and what we are talking about, then please leave a 5 star review so other local small business owners know this is a podcast that they can’t miss. Plus, go back and download previous episodes and get caught up.
Don’t forget to tune in next time for our question from one of you. Yep, it’s question Friday next time. So make sure to come on back. If you want to ask a question for the show, then don’t forget to visit the website at LocalSmallBusinessCoach.com to leave your question for me to possibly answer on the podcast in the future. You can leave it via the Speakpipe button or just shoot me an email.
Meanwhile, I wish you the best in your business and remember: Great Customer Service, coupled with Great business practices will set you on the path to Great Profits!
Bye for now…..
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My Recommended Bookkeeping Program for Local Small Business Owners: Freshbooks Link
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Today's episode, as well as all of our episodes, is brought to you by trainingforlocalsmallbusinessowners.com. Where we provide free tips, tools and resources for your local small business. So whether you are just starting out or you've been in business for a while and want to learn more ways to increase your profit, boost your sales, improve your processes and develop stronger teams then head on over once again to trainingforlocalsmallbusinessowners.com..
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See you on the next episode!
Two Great Books to Help You With Your Small Business:
Highly Recommend all Local Small Business Owners Read the eMyth by Micheal Gerber. You will learn some critical things about running your business.
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