Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (46 page)
Every business is unique; you may find that none of the off-theshelf systems meets your requirements. Industry-specific POS packages are available—for auto repair shops, beauty and nail salons, video rental stores, dry cleaners and more. In addition, some POS system manufacturers will tailor their software to your needs.
Inventory TurnoverWhen you have replaced 100 percent of your original inventory, you have “turned over” your inventory. If you have, on the average, a 12-week supply of inventory and turn it over four times a year, the count cycle plus the order cycle plus the delivery cycle add up to your needs period. Expressed as an equation, it would read:
Count Cycle + Order Cycle + Delivery Cycle = Needs Period
For instance, suppose you decided to count inventory once every four weeks (the count cycle). Processing paperwork and placing orders with your vendors take two weeks (the order cycle). The order takes six weeks to get to you (delivery cycle). Therefore, you need 12 weeks’ worth of inventory from the first day of the count cycle to stay in operation until your merchandise arrives.
You can improve your inventory turnover if you count inventory more often—every two weeks instead of every four—and work with your suppliers to improve delivery efficiency. Alternate ways of distributing goods to the store could cut the delivery cycle down to three weeks, which would cut inventory needs to six weeks. As a result, inventory turnover could increase from four times a year to eight times.
Another way to look at turnover is by measuring sales per square foot. Taking the average retail value of inventory and dividing it by the number of square feet devoted to a particular product will give you your average sales per square foot.
You should know how many sales per square foot per year you need to survive. Calculate your sales per square foot once a month to make sure they are in line with your expectations.
Inventory AccountingIf you spend a few minutes considering inventory, how you account for that inventory, and the taxes you must pay on it, you’ll never again question the need for an accountant. However, it’s important for every entrepreneur to have a basic understanding of inventory accounting, even if you rely on your accountant to do the actual numbers. There are two methods used for inventory valuation:
THE ONE AND ONLYF
or decades, conventional wisdom warned that depending on a sole supplier could sink your business. After all, such a situation could spell doom if there were any interruption in your supply of products.However, there are some situations where relying on a sole supplier makes sense. For example, if you’re a specialty clothing retailer and most of your sales come from a certain product line, you may find yourself with a sole supplier. In some cases, there is only one supplier who can deliver the raw materials you need to make a product. In other cases, a company strikes an agreement with a sole supplier in return for special pricing deals.The key to making a sole supplier relationship work is to make sure all the right safeguards are in place. Protect yourself by asking suppliers about backup product sources. Find out how many manufacturing plants and distribution centers exist in their product pipeline. Ask what contingency plans they have to supply you in case of emergency. What are their obligations to you in the event of a shortage? Will their top one or two customers get all the products they need, while your business has to wait in line?Keep up-to-date on alternative supply sources that could help your business survive temporary shutdowns from your sole supplier. Use your trade association directory and industry networking contacts to help expand your supplier pipeline. Above all, make sure you feel comfortable entering into a sole supplier relationship before you sign on the dotted line.
The
last in, first out
(LIFO) method assumes that you will sell the most recently purchased inventory first. For instance, suppose you bought ten ceiling fans a year ago at $30 each. A week ago, you pur chased a second lot of ten ceiling fans, but now the price has gone up to $50 each. By using the LIFO method, you sell your customers the $50 ceiling fans first, which allows you to keep the less expensive units (in terms of your inventory cost) in inventory. Then, when you have to calculate inventory value for tax purposes, LIFO allows you to value your remaining inventory (the $30 fans) at substantially less than the $50 fans, so you pay less in taxes.
last in, first out
(LIFO) method assumes that you will sell the most recently purchased inventory first. For instance, suppose you bought ten ceiling fans a year ago at $30 each. A week ago, you pur chased a second lot of ten ceiling fans, but now the price has gone up to $50 each. By using the LIFO method, you sell your customers the $50 ceiling fans first, which allows you to keep the less expensive units (in terms of your inventory cost) in inventory. Then, when you have to calculate inventory value for tax purposes, LIFO allows you to value your remaining inventory (the $30 fans) at substantially less than the $50 fans, so you pay less in taxes.
AHA!A letter of credit from a major customer can be used as a form of security in establishing relationships with suppliers. For instance, if you’re starting a business manufacturing garden hoses, you could get a letter of credit from your biggest customer when the order is placed, showing that the customer has contracted to buy the finished hoses. The material to make the hoses is then purchased using the letter of credit as security ... and you don’t have to put up a penny.
First in, first out
(FIFO) was the traditional method used by most businesses before inflation became common. Under FIFO, the goods you receive first are the goods you sell first. Under this method, you value inventory at its most recent price. FIFO is usually used during periods of relatively low inflation since high inflation and increasing replacement costs tend to skew inventory accounting figures.
(FIFO) was the traditional method used by most businesses before inflation became common. Under FIFO, the goods you receive first are the goods you sell first. Under this method, you value inventory at its most recent price. FIFO is usually used during periods of relatively low inflation since high inflation and increasing replacement costs tend to skew inventory accounting figures.
LIFO establishes the value of your inventory based on the most recent quantity received, while FIFO establishes the value of your inventory based on the oldest item in it. You can use either dollar control or unit control with these methods. Match your system to your needs, based on your accountant’s recommendations.
Buying InventoryYour inventory control system will tell you when to buy replacement inventory, what to buy (and what not to buy), and how much to buy.
The
open-to-buy
is the amount budgeted for inventory purchases for a given period—usually one, three or four months. Since you are a startup without past performance to guide you, you must calculate the open-to-buy by determining the gross sales you need to pay store overhead and cover your other costs.
open-to-buy
is the amount budgeted for inventory purchases for a given period—usually one, three or four months. Since you are a startup without past performance to guide you, you must calculate the open-to-buy by determining the gross sales you need to pay store overhead and cover your other costs.
Your business plan should give you an idea of the basic stock levels and monthly or seasonal sales volume you need to have dur ing startup. After your business has been up and running for several months to a year, your inventory control system will provide this information.
e-FYITrade shows are a great place to show off your products to the public as well as potential suppliers. At the same time, you can check out the competition. They’re also a great resource for networking. To find a trade show in your area, visit
The Trade Show News
(
tsnn.com
), an online directory of more than 17,500 trade shows and conferences.
Figure out your open-to-buy using the following formula:
| planned inventory | $25,000 |
| plus planned sales | +$25,000 |
| equals | $50,000 |
| less actual inventory | -$27,000 |
| less stock on order | -$13,000 |
| equals open-to-buy | $10,000 |
Most seasonal retailers calculate their open-to-buy seasonally to accommodate variations in the type of merchandise they sell and seasonal sales fluctuations. Instead of figuring open-to-buy in dollars, some retailers approach trade shows and other merchandise sources with a list of what they need to fill out their inventories and meet sales projections. But whether they work with dollars or by unit, experienced retailers recommend that the owner of a seasonal business should feel free to go beyond the budget or use less than the entire open-to-buy amount. In fact, you should leave room for unanticipated items.
SuppliersSuppliers are essential to any retail business. Depending on your inventory selection, you may need a few or dozens of suppliers. Sometimes suppliers will contact you through their sales representatives, but more often, particularly when you are starting out, you will need to locate them yourself—either at trade shows, wholesale showrooms and conventions, or through buyers’ directories, industry contacts, the business-to-business Yellow Pages and trade journals, or websites. Suppliers can be divided into four general categories.
1.
Manufacturers
. Most retailers will buy through independent representatives or company salespeople who handle the wares of different companies. Prices from these sources are usually lowest, unless the retailer’s location makes shipping freight expensive.
2.
Distributors
. Also known as wholesalers, brokers or jobbers, distributors buy in quantity from several manufacturers and warehouse the goods for sale to retailers. Although their prices are higher than a manufacturer’s, they can supply retailers with small orders from a variety of manufacturers. (Some manufacturers refuse to fill small orders.) A lower freight bill and quick delivery time from a nearby distributor often compensate for the higher per-item cost.
3.
Independent craftspeople
. Exclusive distribution of unique creations is frequently offered by independent craftspeople, who sell through reps or at trade shows.
4.
Import sources
. Many retailers buy foreign goods from a domestic importer, who operates much like a domestic wholesaler. Or, depending on your familiarity with overseas sources, you may want to travel abroad to buy goods.e-FYIBefore you go to a trade show in search of inventory suppliers, do your homework. The Trade Show Learning Center (
fastsigns.com/tradeshow-center.html
) provides a wealth of information, sign design tips and checklists to help you prepare.
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