BW Newsletter

BW-Newsletter-Issue #2 The Over-Under of Inventory Control

The Over-Under of Inventory Control by Ben Bowman, Go Intellectual Capital

As a retailer, there are a fair number of things you don’t have control over; the economy, the weather and industry regulation are all good examples. All you can do is focus your time and energy on the things you do have control over. Thankfully, your inventory/stock is one of them … and, it’s a BIG one. The manner in which you control the flow of inventory into your shop will make all the difference between your business being profitable … or not.

  • An OVER supply of stock/inventory is costly to a business in a number of ways. For starters, it takes up space, costing money and staff resources to store and maintain it. If the stock sits too long, you may be forced to eventually sell it at a heavily discounted price just to move it out the door. And, the upfront capital you spend on big orders cannot be used to invest in other things or to simply sit in your bank account, collecting interest.
  • An UNDER supply of stock/inventory is also costly to a business in a number of ways. Ordering too little means you may run out of popular inventory and miss out on potential sales. Not meeting the demands of your customers can cause them to lose confidence in your shop – or worse yet, your brand. Customers may turn to your competitors for the product you couldn’t provide, which risks future sales from both from your customer and anyone they might have otherwise referred to your shop had they been adequately served.

So how do you successfully play the odds when it comes to inventory investments?

  1. Take advantage of volume discounts on high selling products whenever your cash flow allows. This allows you to cut your cost and turn over a high volume product, which equates to more profit for you and cash flow in to your bank account.
  1. Consolidating vendors allows for valuable opportunities to form trusted, lasting relationships and earn pricing discounts, more flexible return policies and access to special promotions offered by your supplier. Forming these kinds of loyalties creates reciprocal relationships where each side truly needs, appreciates and rewards the other. Another benefit is that you’ll have fewer relationships to manage – saving you time (and “time is money”, right?).
  1. Documenting your inventory turnover rate is a critical part of the profitability and cash flow formula. Turnover is the rate at which you sell your inventory on hand during a given period of time. Good turnover rates vary by industry but a general rule of thumb for vaping retailers is that inventory should turnover every 45 days.

You can easily calculate average inventory turnover (across all product lines) by dividing COGS (cost of goods sold) by the average amount of inventory on hand over a specific period of time. For example, suppose you sell $4000 worth of leather clutches in a three-month period and you keep $2000 worth (on average) in your inventory during those three months. This would make your inventory turnover “2”, since your inventory turned over twice in the three-month time period.

A high turnover rate could indicate an unexpected uptick in sales – or, that you are under-pricing your products. Good sales tracking methods will help you figure out which it is. Low turnover rates could mean you’re overstocking or holding onto products that simply aren’t selling. This is where it’s helpful to go beyond the “average” turnover calculation and get specific, by SKU. Yes, it’s a lot of work, but a well-planned spreadsheet will be your best friend and it’s well worth the effort if you like making money.

One final note on turnover: Be wary of falling into the trap of holding onto “toxic inventory” … toxic to your business, that is; not to your customers. Toxic inventory is slow moving inventory that might “feel good” to have on the shelf but is really costing you money. Examples of this would be “cool” packing or “fun” product names or flavoring combinations that you just couldn’t resist purchasing.  You can always special-order a product or do a trial run to gauge customer demand instead.

Think about your inventory as if each item is a small stack of actual dollar bills (your dollar bills) sitting on the shelf – and the only way you get to put that cash back into the drawer – or the bank – is if a customer walks into your shop, picks up the bills and brings them to the register.  If the bills sit there too long, you’ll get back only a fraction of their actual value …  and you may even have to throw them directly into the garbage at some point…. YIKES.

In conclusion, be sure to carefully select and track your inventory and you will soon be managing this portion of your business like a pro.

This information is provided for general information only. It is not legal advice. Always consult a lawyer before taking any actions regarding the subject of this article. Do not take any actions in reliance upon the information presented.

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