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“I’m booking solid revenues, but I need some tips on how to handle inventory management.”
You’ve already got a head start on a lot of people wondering how to run a small business
if your revenues are “solid.” Congrats! For many entrepreneurs,
inventory management takes a back seat to things like generating
revenue, personnel issues, finicky customers, or raising financing, but
it shouldn’t. Whether you’re in retail, wholesale, distribution, or
manufacturing, our view is basically the same…
Effective inventory management is key to running a profitable business.
You’ve probably heard terms like “lean manufacturing” and “just in time”
delivery – examples of streamlined inventory management techniques.
Consistent with these techniques, we like to think of inventory as cash
in transit. Every day you have inventory that is not being sold, your
profit margin erodes. Here are some key tips to get your inventory
strategy on track:
Get an attitude
Your attitude about inventory is the key to successful inventory management.
Think about inventory as a wasting asset. Unless you are dealing with
wine or single malt scotch whiskey, inventory does not improve with
time. Inventory becomes less valuable with every passing day. It takes
space, heat, light, power, handling, insurance and, of course, interest
to carry. Every day you have inventory and no sales your profit margin
will erode. So as you’re planning how to run your small business, try
not to carry any more than is absolutely necessary.
Don’t be shy – it’s a competitive market out there and suppliers want your
business. Negotiate with them to extend payment terms. Consider
utilizing drop shipments. You can even negotiate consignment
arrangements or vendor-managed inventory techniques.
The way in which you finance inventory is critical. A basic point in
inventory management is to ensure that your payment terms are longer
than the terms you extend to customers. Consider different financing
options such as purchase order financing or asset-based lending. The
old axiom “cash is king” applies.
Inventory should be eliminated regularly by using special promotions, unique
discounting, barter exchanges and charitable donations. Remember – keep
that inventory moving, keep it fresh and keep your customers happy with
special offers such as, “half off” or “2-for-1.”
Knowledge is power
Like never before, new technologies and techniques enable you to command
knowledge about how you run a business. With knowledge comes the
ability to control your destiny. So use the best information system you
can to capture history and forecast demand. Stay close to your customer
so you know what his needs are. Stay “cozy” with your suppliers to
learn about demand for their products and about new product
We know as well as anyone that you’ve got a lot of things to think about in order to run a small
business like an ace. Though it seems like one of the less dynamic or
demanding aspects of your business, inventory management can actually
be the lynchpin between you and profitability, so make sure you’re proactive about it.