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I recently spoke to a business owner who was in a real bind – an inventory bind. He had gotten caught in the inventory trap.

A very influential customer had called and said they were considering placing a big order. The customer asked if they would be able to handle it. The owner did the math and said yes. If he wanted to fill the order, he would need more inventory.

He immediately called his supplier. The supplier said, yes, they could produce it. To be ready for the “big order”, the business owner asked them to start. The inventory began arriving a few days later.

Then came the problem. Two weeks later the large customer said they had changed their mind.

The business owner had already received his order and, no he could not return it. He felt it would take about 12 months to sell if he was lucky. His cost was $300,000 and he had gone into his line of credit to buy the product. He had fallen in the inventory trap.

It is an age-old dilemma. Which comes first – inventory buying decisions or sales vision?

Yes, there are some who buy inventory based on what they hope they can sell. Large retailers do it all the time. But they don’t do it in a vacuum. These large retailers determine what to buy via a rigorous testing process. They buy new items in small quantities and test in 15-20 stores. What sells quickly out of the box will potentially become part of the large buys for future deliveries.

Next, they also spend a ton of money on advertising, which influences customers buying their inventory.

And THEN, if they are wrong and buy too much, they quickly mark it down to cost or below to get rid of it.

However, most businesses don’t have these resources. So, too often this becomes a lesson many learn the hard way. Many don’t learn and simply drown in a sea of product they can’t sell.

 

So what is the answer?

The answer is you do not buy inventory based on sales hopes and dreams. Rather, you actively sell what you have in your inventory.

Said another way, you buy inventory based on a well thought out plan. Then you aggressively sell everything you have in inventory.

This is why you need good inventory management and a solid, consistent, well-managed sales process.

The worst answer is to buy inventory and then hope you can sell it. Sure there are exceptions, but ask yourself how many exceptions can you make?

Do this – run a report on how much inventory you have on hand that is over six (or even 12) months old. Compare the total cost of that inventory to your bank line of credit. The amount of stale inventory is often close to the line of credit balance. Surprise!

It is never a good business model when your bank loans you money so you can go out and buy a bunch of inventory that you never sell. This is often why your bank can’t give you more credit.

It’s also why you don’t make money in your business.

So do this. Just sell the old stuff. You might not make anything on it and you might even lose some money. But take whatever cash you can get and go out and buy some stuff you can actually sell and make money.

Remember, we aren’t running museums. We are running businesses.

Contact me at:
Brad Martyn, FocusCFO
b.martyn@focuscfo.com
614-944-5760
http://www.focuscfo.com

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