The Cash Flow Challenge: Why Inventory Management is Critical for Small Retailers
Managing inventory levels is one of the most complex challenges for retailers, and a major part of that challenge is determining how to provide buyers with realistic budgets, targets and a way to test the impact of their decisions on sales, margins and inventory. Retail inventory control is more challenging than ever because of the evolution of customers into “multi-channel” shoppers. Consumers now browse, research, purchase and return retail merchandise through multiple mediums – including traditional brick-and-mortar stores, e-commerce websites, and catalogs or call centers.
If you’re a small retailer, it’s easy to focus on sales, and assume that if you are running increases that everything else will take care of itself. Take care of the customers and they will take care of you. But in the end, the true measure of where a small retailer stands is cash flow.
For small retailers, it’s not uncommon for 80% to 90% of their assets to be invested in inventory. This makes small retailers unique from many other small businesses. Holding too much inventory, or the wrong inventory, ties up valuable cash, while not having enough inventory of key items or categories deprives a small retailer of desperately needed gross profit dollars.
And yet, many small retailers, especially those still in the start-up phase, do not possess well developed inventory management expertise. They invariably have a passionate commitment to the merchandise they are carrying and a keen understanding of their customer’s needs and expectations. They keep a close eye on cash coming in and going out, but too frequently they do not possess the skills and background to manage the largest asset on their balance sheet: their inventory.
Effective inventory management can be defined in its simplest form as having the right products in the right place at the right time in the right quantities. It combines merchandising, operations, logistics, vendor management, in-depth quantitative analysis, and a commitment to detailed planning.
4 Key Concepts for Effective Retail Inventory Management
Here are four (4) key concepts that lead to effective retail inventory management and inventory productivity – Merchandise Financial Planning, In-Store Tasking, Supply Chain Visibility, and Business Analytics.
1. Merchandise Financial Planning: Building a Financial Framework for Buying Decisions
The process of merchandise financial planning, often termed just ‘planning’, is an effective way to provide your buying or inventory team with the financial framework they need to make product and buying decisions. Very simply, the framework creates and maintains a system to forecast key retail inventory drivers. There are many specific inventory related drivers that must be identified by your CFO.
Each of these drivers affects the others, so it is critical to identify and manage them correctly. The merchandise financial plan that results from the identification of these drivers will give your buyers or inventory team the dollar amount of stock to purchase.
Planning is part of an informed number crunching approach to inventory. As a result, it is not a skill most buyers are required to have. If planning does not occupy a pivotal position in the inventory management process, it is doomed to be regarded as irrelevant. What this means is that planning must be a vital part of the budgeting process and needs to be reviewed weekly, as with sales, to determine possible changes in inventory and margin assumptions going forward.
2. In-Store Tasking: Empowering Associates with the Right Tools
In addition to Merchandise Financial Planning, it is imperative that you find an in-store retail inventory software solution that makes it easy and efficient for store associates to execute tasks that support cross-channel retail sales, including performing periodic cycle counts, inventory lookups at neighboring store locations, and some base level analytics.
3. Supply Chain Visibility: Real-Time Insights for Proactive Decisions
You should have instant access to information pertaining to inbound and outbound shipments (from any point in the supply chain), current order status, as well as inventory for both on-hand and in-transit goods. This information should be flexible and easy for Home Office and In-Store associates to learn and use.
You should also make sure that there are timely reconciliations between your internal merchandise on-order (at cost) and your key vendor or supplier’s records of the same.
4. Business Analytics: Measuring and Optimizing Inventory Performance
It is critical to gather key performance measures from each store to monitor efficiency and effectiveness over time. Look for retail inventory systems that automate the collection of metrics (KPIs – Key Performance Indicators) and consolidate them across all distribution channels. To manage it, you must measure it. Your CFO will identify and manage the appropriate measures to improve your inventory productivity.
Think in Terms of Time: The Key to Healthier Cash Flow and Profitability
Small retailers who think of their inventory in terms of time almost always experience fewer markdowns and fewer build-ups of dead inventory, faster inventory turnover, and healthier cash flows. With healthier cash flows and a keen eye on weeks of supply, a small retailer will always have the ability to be a true merchant, to make that advantageous purchase, chase a key item, or capitalize on the latest emerging trend; those are the true keys to generating consistent sales increases and profitability.
Ready to transform your retail inventory management? Contact FocusCFO today to learn how a Fractional CFO can provide strategic guidance and tailored solutions to boost your business's success.
