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A periodic inventory count is a fundamental requirement; any items that are overstocked should be investigated.
A sales forecast is vital, without it you lack
necessary management information for inventory control.
Your target inventory investment should equal your normal investment for core sales plus a built in safety stock (for example if a re-order is delayed you want some extra stock on hand) plus some amount for any anticipated growth in sales.
You can use following equation to determine your economic ordering quantity: SQRT (2SO/CP) where
SQRT = square root S = anticipated annual unit sales O = fixed costs per order C = annual inventory carrying cost, as a % of a products purchase price P = unit purchase price for product
Note that above equation attempts to minimize inventory cost by answering question of how much and how often you should order inventory. It is not perfect; equation does not take into account volume discounts and assumes that your demand is constant. However it is a tool that can be used to help in your decision making process.
The following are 10 questions you can use to review you inventory process:
1.Do you have a sales forecast? Do you compare forecast to actual sales and adjust next forecast accordingly? 2.Do you know which items account for 80% of your sales? These items should be managed closely. 3.How fast can you get inventory? 4.How do you order inventory? 5.How much inventory do you order? Do you order extra just to save a few extra cents? 6.Do you know cost of holding your inventory? 7.Do you rely on just one or two suppliers? 8.How frequently is inventory analyzed to determine obsolescence and makeup? 9.Do you have a policy of determining what is obsolete inventory and how and when to get rid of it? 10.Do you have an inventory reporting system to provide necessary tracking information?
Accounts Payable
Although you want to stretch your payables as long as possible, much like you offer attractive discounts to your buyers you should also take supplier discounts as often as possible if terms are attractive enough.
Make sure your payables are tracked on a regular basis - such as weekly - and that your payment system runs smoothly.
As with receivables and inventory, complete a monthly analysis of your accounts payable and compare to previous periods and industry averages. Any material difference or change should be investigated.
Make sure vendors understand your company in case there is a situation where you need to stretch your payables. You need a plan to deal with those situations where you may have an unexpected spike in your payables.
You should re-evaluate you vendors on a regular basis to make sure you are getting best value.
4. Budget
It is fundamental, you need to plan for growth and you need to forecast for problems. You need to prepare a budget. Besides completing a budget for expected sales, you should also complete a budget for a disaster situation, like your sales are cut in half. The benefit is very straight forward; it forces you to ask yourself how you will be able to keep company running in such a situation. It will also point to areas where you may be able to save money right away and free up cash flow. It's like having a disaster plan; you only have to act on it when disaster strikes, but it is much easier to concentrate when you do not have a crisis at hand.
5. Develop a strong relationship with your Bank
Devote attention to building relationships with your bank. Always keep them up to date on where your company stands. If you hit a difficult patch it is much easier to get your bank on board if they understand your business. Contrary to opinion, banks do not necessarily jump ship as soon as you fall into trouble. They are willing to work with small business through tough times, and gaining their trust to do so is much easier more confidence they have in you and your company. They way to accomplish this is to be transparent in your dealings and to give them timely financial information.
Use you bank as a resource for cash management. There are products available that can increase your cash flow, or arrangements that can be put in place to increase your interest returns. But you still need to make sure they are cost effective.
Jeff Schein is a CGA and offers consulting and advice in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or mailto:jeff@companyworkshop.com
