Now that is great to get to the point where at the start of the special events and seasonal periods we have a purchase target.
But what is the normal procedure at this point in most stores? File it away?
The work done to get to this point is too valuable to be relegated to a filing cabinet or the too hard basket.
The reasons why are endless, but such excuses for inactivity are actually dangerous to the future financial viability of a store.
Why? Well ask yourself the question: what is the only reason why we could go bust? Answer: we run out of cash!
Where is the cash tied up in a hardware store? In one of three following areas:
It’s inventory management which we are concerned with here.
CONTROLLING INVENTORY MANAGEMENT
Let’s use a theoretical example, based on a Stock Productivity Index [SPI] target of 150 at a Gross Profit Margin of 30%, which provides a Stock Turn Target of 5 times per annum.
|Less Target Cost of Sales|
|Available Target Stock||$840,000|
|Target closing stock||$140,000|
|Cost of Sales||$700,000|
How does inventory management get out of control? There are only two reasons you can be overstocked:
The trick to getting inventory under control is to monitor it by using what I call the “one minute report”.
So how do you put together this report?
These two numbers should balance with the summary numbers above.
By the way, I have a free Excel-based management tool on my website which can easily do all this for you and even provide a monthly targeted closing stock figure.
HOW DOES THE “ONE MINUTE REPORT” WORK?
Let’s look at a three-month example for say a seasonal department:
So, at the end of Month 1, the numbers show that the business is $70,000 overstocked.
The answer however is not to try and fix the problem by endeavouring to control the uncontrollable – that is, using sales.
The first control method most stores use is reducing prices.
The trouble is that this will affect profitability and also the cash derived from sales in Month 2, which is not such a good idea.
The easiest method to get Month 2 on track is to use what we can control – the Purchase Target budget for that month – which is $192,000.
What I would do in these circumstances, since I have a budget, is to reduce the purchasing from by $90,000 and reset the purchases for Month 2 to $102,000.
The benefit of this “one minute report” is that it keeps you on track to hit your SPI target and more importantly helps prevent you bleeding cash.
I think you agree that’s not a bad return for just a minute of your time spent monitoring actual results against budget to protect your cash flow.
Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au
You can find all of Peter Cox's most recent Money Matters articles here.